Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 3 - Evidence - Meeting of December 5, 2013
OTTAWA, Thursday, December 5, 2013
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 10:30 a.m. to study security conditions and economic developments in the Asia-Pacific region, the implications for Canadian policy and interests in the region, and other related matters.
Senator A. Raynell Andreychuk (Chair) in the chair.
[English]
The Chair: Honourable senators, today the Standing Senate Committee on Foreign Affairs and International Trade is continuing its study on security conditions and economic developments in the Asia-Pacific region, the implications for Canadian policy and interests in the region, and other related matters.
In our session this morning, we are pleased to welcome Mr. Todd Winterhalt, Vice President, International Business Development, with Export Development Canada.
Mr. Winterhalt, we will hear from you your opening remarks. As usual, the senators, no doubt, will have questions. Welcome to the committee.
We are still in the phase of looking at broader issues in Asia-Pacific. We're looking for help to identify areas that should be concentrated on and perhaps are not being touched by either the House of Commons committee or others such as academics.
So we are in the process of narrowing into areas. But at the moment, we would like to hear your perspective on Asia- Pacific vis-à-vis Canada. Welcome to the committee.
Todd Winterhalt, Vice President, International Business Development, Export Development Canada: Thank you very much, Madam Chair and honourable members, for inviting EDC to appear before the committee today. We certainly appreciate your interest in Export Development Canada's activities in support of deepening Canada's trade agenda with the Asia-Pacific region, and in particular with the ASEAN markets.
Over the last five years, ASEAN's share of Canada's merchandise export trade has remained roughly the same, at about 1 per cent of Canada's overall exports, increasing very slightly to 1.1 per cent at the end of 2012. Our exports to ASEAN totalled $4.4 billion in 2008, declining in both 2009 and 2010 as global economic conditions faltered, but have since recovered to a level approaching $5 billion last year, as I mentioned. In particular, Indonesia continues to be the lead destination for Canada's export trade to the region, representing slightly more than a third of that total — roughly $1.6 billion — last year in overall volume.
The balance in bilateral trade has also remained fairly constant over this period, with imports from the ASEAN markets essentially doubling Canada's exports back to the region. Total bilateral trade in 2012 reached almost $16 billion, with $10.8 billion of that being imports from the region, against roughly $5 billion of exports.
Despite having taken almost a decade to double Canada's export levels to ASEAN markets, there are a number of recent and encouraging signs that Canadian prospects for growth are on the rise. Export levels for this year, for example, in the first three quarters are up almost 15 per cent, driven largely by higher volumes from Canada's commodity industries; namely, forestry; metals, particularly gold and recycled metal; and agri-food, wheat and pork products in particular.
Happily, I would say the increase also stems from Canada's success in manufacturing and technology, with many of our companies signing new sales contracts. In particular, Bombardier and Bell Helicopter have been winning sales of aircraft in high-growth markets like Indonesia, while BlackBerry counts ASEAN as one its most successful markets or regions worldwide. With over 15 million people having a BlackBerry handset, that number represents over 20 per cent of all BlackBerry users worldwide.
More advanced technology segments are also experiencing double-digit growth over last year's levels, particularly as rising middle-class populations drive the rollout of new technologies. Transportation and retail infrastructure are also seeing major increases in many of the ASEAN markets.
As a region, GDP grew by 5.7 per cent last year. This is significantly above the levels we see in Canada's more traditional export markets. The U.S., for example, last year saw 2.2 per cent GDP growth. The EU as a region actually had a 0.5 per cent GDP decline.
So this rate of growth, the evolution of consumer spending, manufacturing advantage now against a China that is becoming more and more expensive — these are all reasons that are drawing the attention of foreign firms to Southeast Asia.
Exporters and investors are also being attracted by the ongoing economic integration of ASEAN markets, which would see the region's 10 countries merge potentially into one large economic union of 620 million people with a GDP of over $2 trillion U.S. That would make it the world's sixth or seventh largest market, depending on the statistics you see.
This integration is also expected to accelerate as trade liberalization policies under free trade and economic cooperation agreements are implemented across the ASEAN nations.
[Translation]
Canadian stock of foreign direct investment into ASEAN reached $7.7 billion in 2011. This is more than the combined investment present in India and China. Investment destined for Indonesia accounts for almost half the total activity. Singapore is second at 30 per cent overall. Professional services, such as consulting, ICT, oil and gas, financial services, manufacturing and environmental industries make up the top segments of investment.
The Asia-Pacific Foundation of Canada recently released findings of their 2013 Survey of Canadian businesses in southeast Asia. It showed that there is a significant Canadian footprint in the region. This presence also has a considerable history of commercial involvement. In many cases, the businesses surveyed had a physical presence in the region for more than 10 years. Financing and other professional services, manufacturing and oil and gas sector players from Canada predominate. Notably, most of the operations are small- and medium-sized enterprises, who are generally highly satisfied with their ASEAN investment.
More than 60 per cent have increased their investment in the region during the last two years, and 81 per cent had positive or very positive outlooks for future investment prospects.
Thailand, Indonesia, Singapore and Vietnam are the leaders in respondents' new market entry prospects. Indonesia leads as the target of expansion for businesses already active in ASEAN.
[English]
This said, the business environment in ASEAN countries remains challenging for Canadians. It is a region of very diverse, complex and cost-competitive markets. The ease of doing business, in particular, across the region varies greatly from Singapore, considered by the World Bank as the easiest market in the world in which to do business, to Myanmar, or Burma, ranked as one of the worst at 182 out of 189 countries. By way of comparison, Canada ranks nineteenth on the World Bank tables.
Of the respondents to the APF survey, 49 per cent indicated that doing business in the ASEAN region was more difficult than doing business anywhere else. This is despite the optimism for the region expressed by these very same respondents to the survey.
In particular, top challenges include: corruption, often noted as the biggest barrier to doing business in five of the 10 ASEAN markets, including high-growth markets of Indonesia, the Philippines and Vietnam; preferential treatment provided to domestic companies in places like Brunei, Thailand and Malaysia; a general inconsistency in the application of rules and regulations, but most notably in Vietnam, Indonesia and the Philippines; and finally, as we see in many emerging markets, intellectual property infringement risk.
Further, general observations around the weakness of infrastructure in many of these markets means that everything from a company's access to electricity to the entry of their goods at port and subsequent distribution remains challenging.
Despite these hurdles, however, there is great potential for both trade and investment for Canadian companies across a wide range of sectors. In the information and communication technology space, Canada's strength in telecom is capable of delivering on a range of needs that ASEAN markets face, from essential and primary communication network building in the frontier markets to more advanced data services and applications support driving the mobile industries in countries like Singapore.
On the agri-food side, as consumer spending and urbanization increase, so too does the need for more efficient processed food and the desire to be exposed to new and Western tastes. In addition to the need for more food resources, ASEAN is also investing heavily in food and beverage machinery and related packaging technologies.
Automotive is another sector in which we see great opportunity for Canadian supply. Thailand, in particular, is now home to over 50 per cent of ASEAN auto production and serves as a regional manufacturing hub for most major OEMs. In fact, the region's automotive sales are growing at more than 7 per cent this year, year over year, with markets like Vietnam, Indonesia and the Philippines all experiencing double-digit growth.
Extractive industries, both oil and gas and mining, see a number of opportunities, through companies like Petronas in Malaysia, PTTEP in Thailand and Pertamina in Indonesia. They are already all key buyers of Canadian oil and gas equipment and supply, and ASEAN's rising energy needs and the emergence of other oil and gas companies across the region, PetroVietnam, for example, will continue to offer Canadian companies supply opportunities.
From an EDC perspective and to help accelerate Canadian opportunities in Southeast Asia, we focused on a few strategies.
First and foremost, develop and deepen our relationship with reputable and creditworthy private sector buyers and borrowers across ASEAN. Examples there would include PLDT; SingTel, in Singapore; and San Miguel Corporation out of the Philippines.
Second, continue to strengthen our financial partnerships in the region, with a particular emphasis on enhancing our suite of financial services supporting small- and medium-sized enterprises.
Third, take additional time to help to match Canadian capabilities with ASEAN market opportunities through targeted, planned matchmaking with EDC's strategic relationships with private and public sector buyers.
[Translation]
Continue Export Development Canada's efforts in reaching out to Canadian investors and exporters to discuss their strategic interest in ASEAN and promote suitable opportunities. Deliver on services with bank partners that create financial capacity for Canadian affiliates in ASEAN. Continue close engagement with Canada's Trade Commissioner Service, bank partners, the Canada-ASEAN Business Council on delivering advisory services and tools for Canadian companies seeking to conduct business with ASEAN.
[English]
Finally, to leverage EDC's project and financial expertise with multilateral agencies, such as the Asian Development Bank and the International Finance Corporation, to help stimulate additional supply and procurement opportunities for Canadian exporters.
In conclusion, I would underscore three main points.
First, despite challenges that exist in Southeast Asia, the region's continued growth presents significant export trade opportunities for Canadian business.
Second, partnerships and a local presence for Canadian companies are critical to their success.
Third, and finally, Canadian companies willing to make the effort to understand the needs of the market and to adapt their products and processes are the longer-term winners of these business opportunities in Southeast Asia.
I'd like to thank you for your kind attention and again for the opportunity to be with you today.
The Chair: Thank you, Mr. Winterhalt.
[Translation]
Senator Fortin-Duplessis: Mr. Winterhalt, welcome to our committee. We always enjoy talking to people from EDC, because they are always up to date on what is happening all around the world, so it is very interesting.
In a brief video that was broadcast last May on the website of the Financial Post, you talked about Indonesia being an interesting opportunity. You have repeated that sentiment today, and so I would ask you to elaborate a little bit on the opportunities that are present in Indonesia.
I would also like to know if you have heard any horror stories. You see, when we went to China, we were made aware of a company that had contracted for a product to be made in China. The product was badly made, so the Canadian delayed payment.
The person who produced the equipment invited the Canadian to come to China. When the Canadian arrived, he was imprisoned because when the case was brought to court, the judge was bribed. That Canadian is still in prison today.
I would like to know about Indonesia, because at one point you mentioned that there was also corruption there, I would like to know if it is the same kind of corruption that we have seen in China and elsewhere, and what we can do about it?
[English]
Mr. Winterhalt: Thank you very much to the honourable senator for the question and for your memory of that video. I had forgotten that it was even out there.
I'll start with Indonesia. In terms of the opportunity, it is a little bit driven by the scope of the country itself. At almost 250 million people now, and with a GDP at purchasing power parity approaching $1.2 trillion, it is almost a monolith in the region and certainly the market that I think attracts many Canadians and Western companies in its own right but also as a hub for additional business to the rest of the region. As I say, the geographic positioning of Indonesia is very favourable for the rest of Southeast Asia.
We're seeing businesses begin to move from Singapore, which has traditionally been the hub, because of the ease of doing business as I mentioned, into markets that are a little bit more challenging, like in Indonesia, because of opportunities both in market and in region.
I would segue from there to say at the same time, and for any emerging market, Canadian companies, any companies, do face elevated risks across a variety of areas, including from a corruption perspective, infrastructure deficit, and differentials in terms of regulatory environments, for example. So Indonesia would be no different, I would say.
It is challenging sometimes to make direct comparisons. We often like to do that with respect to China, again because of the size of that market and the experience we've had. But Indonesia has followed, I would say, a very different path in terms of its evolution as a market: less, obviously, of a communist influence there, but certainly issues remain.
The counsel we often give to Canadian exporters and investors interested to proceed to Indonesia or any emerging market is really the elevation of their due diligence that's required. There they can rely on the trade commissioner's service, provincial trade organizations, or the services that EDC can provide financially to help mitigate some of those risks.
Canadian companies really do need to have their eyes wide open before they enter in there. Indonesia is not Singapore, I guess, is where I would leave it. There are elevated risks, but there are also ways to help mitigate some of those risks.
[Translation]
Senator Fortin-Duplessis: Could you tell me if there is an EDC office in Indonesia?
[English]
Mr. Winterhalt: No, at present there isn't. In Southeast Asia we have our hub city based in Singapore. We've been present in Singapore since 2008. We first entered Southeast Asia through Malaysia in 2004 but again found the flow of Canadian trade and investment really coming in through Singapore. So, after four years in Malaysia, we actually moved our office to Singapore to be closer to the activity of Canadians.
But Indonesia is on our radar in terms of a medium-term possibility. Again, we would, I think like all folks, like to see a little more development of the regulatory environment and see some of the risks mitigated.
[Translation]
Senator Fortin-Duplessis: Have you taken any steps with the government to request that there be an office there?
[English]
Mr. Winterhalt: At this point in time, no, we haven't.
Senator Ataullahjan: Thank you, Mr. Winterhalt, for your presentation this morning.
The EDC connects domestic businesses to global markets. When you're connecting local businesses globally, specifically in this region, what considerations are taken in regard to workers' rights, and have you found any issues with workers' rights in this region?
Mr. Winterhalt: I will respond, at least initially, by saying I find this to be an issue that we confront in any emerging market, whether it's labour issues, workers' issues, even more broadly under what we would call the CSR umbrella, environmental and other types of issues. Many of these emerging markets are only beginning, in some cases, to put in place either the regulations or the processes that we would see in other parts of the world in westernized nations. So it is absolutely something that remains on the top of our mind whenever we are assisting a Canadian exporter or an investor enter a market.
In fact, in many cases, depending on the nature of the project, there would be legislative requirements for EDC to make sure that environmental risks are properly and appropriately assessed so that we are in compliance with either World Bank or international performance standards with respect to the work we do there. That includes both labour rights and environmental standards on that side.
These issues are very much top of mind for us and for, we find, most Canadian companies. It's fine to have the opportunity, but it needs to be conducted in a way that's in line with Canadian values.
Senator Johnson: Good morning, and thank you for coming. I really enjoyed your presentation.
Overall, Canada has a large trade deficit with countries in the Asia-Pacific region. In 2012 the value of Canada's merchandise exports to the Asia-Pacific region was $47 billion, while the value of the imports was roughly, I'm told, 94. What explains this deficit with the Asia-Pacific region in Canada?
Mr. Winterhalt: Yes, it's interesting. I mentioned Indonesia as a particular example. We find even at the country-by- country level that it's about a 2-to-1 ratio in the Asia-Pacific region. As companies seek opportunities to help lower their cost of production, we see opportunities for additional Canadian investment or CDIA — Canadian direct investment abroad — into regions and less by way of exports. So it is a bit of a leading measure.
In many emerging markets you'll often see Canadians setting up operations there to help essentially reduce their production costs for either opportunities in market or to come back to Canada. So it tends to be almost an evolution as markets develop that you see investment flows first peak, and then export dollars would seek to rise over time.
On the flip side, when you have a lower cost of production, as we do in many of the Southeast Asian markets, that makes those goods and services very cost competitive, so as a buying public we see a lot more interest in fighting for those lower-priced goods. That generally explains the differential, but it does interestingly tend to follow a bit of a timeline so that as these markets develop and get more purchasing power themselves and their appetites change for more westernized products in particular or on the ICT side — information communication technologies — or even in agricultural products, we would then see the export levels start to rise.
Senator Johnson: You mentioned westernized products. What are Canada's main imports from the region and its main exports?
Mr. Winterhalt: I'll start on the export side. We see today mostly what we would say are traditional Canadian products, so whether that's commodity based or manufactured products where we have a distinct competitive advantage.
On the commodity side, as I mentioned, we still see lots of wheat, grain, pulses. Pork products in particular have a large market in Southeast Asia.
On the more processed or value-added side, certainly our aerospace industry has a good track record there. We continue to see, both from a regional jet perspective and a turboprop perspective, that Bombardier does well. Bell Helicopter is quite active in Southeast Asia as well. As I mentioned, BlackBerry and a number of ICT companies, including those like Mitel, have a strong market share there. That would tend to be where we see most of the exports go in.
On the reverse side, we would see a great deal of sectors covered in terms of imports. That could be from textiles to basic machinery, light manufacturing equipment, less resource coming this way, more still going the other way. There is more and more offshoring of service provision, where you see essentially telemarketing centres or things set up elsewhere. We would see a great outsourcing of that to the Southeast Asian market space.
Senator Johnson: That would mean as well that we're beginning more and more — and you made three points — to understand the needs of the markets. Do you feel we're making significant progress despite the trade deficit we were just discussing?
Mr. Winterhalt: I do. Again, to me it's all part of what we would call the integrative trade chain. Where things are produced and their end markets are located has changed fundamentally in the last 10 or 20 years. What we've really noted is, for example, let's say 10 or 15 years ago, China and India were seen really as the only major poles of investment or export destination for Canadians, and a lot of production was set up off shore in those countries. As those markets continue to evolve and develop and their own purchasing power increases, their own cost of production increases. We see it actually migrating from China and India to countries like Vietnam, to the Philippines, to Thailand, where the cost of production is lower.
We see almost a horizon or a timeline in evolution within a market, and so that's what I'm referring to by understanding how those trade flows are changing. Again, we see great opportunity for Canadian auto parts suppliers into Thailand now to better serve the Chinese and Indian markets going forward.
Senator Johnson: That's very helpful.
I will have other questions.
Senator D. Smith: Yesterday we heard two witnesses, John Curtis and Colin Robertson. You probably know both of them. One of the points Colin was making was that China is kind of like a role model.
When our committee was doing the BRIC report, we were over in Shenzhen, which used to be a village. It is now bigger than Hong Kong's population. When you go by all these factories for miles, and we went through the Honda one, you wonder what level of high-tech education society needs to have all the jobs necessary to do this high-tech manufacturing. When you talked about the different countries in the ASEAN group, I didn't notice much reference to education.
I suppose Singapore has the highest, but it would have higher labour costs too. Maybe you could comment on the level of high-tech education necessary and how these different countries compare on that front, factoring in labour costs in those countries.
Mr. Winterhalt: Certainly.
Senator D. Smith: The potential for manufacturing.
Mr. Winterhalt: I would agree that there is an absolute need for an increased level of education throughout the ASEAN region, in particular in the smaller markets included in that region. I would say they are a little behind the standards and the level of education in China or in India, for example.
There is absolutely a desire and a need to try to catch up. Certainly at the individual country levels and as a regional block, they have illustrated a need to raise the game to increase the level of education, whether it be in a general way or more specifically high-tech manufacturing, so that those jobs can be attracted to the region.
They have demographics working in their favour to a large extent. They tend to be a much younger population than China or India would have, are much more in tune with new ways of learning, and have an adaptability and flexibility to utilize technology and understand its value.
What's quite interesting, and I would hear this from my colleagues in the trade commission service, is the level of opportunities for Canada as an educational exporter, so to speak. There remain significant opportunities to export our programs and education systems to a number of these markets and, from a reverse direction, to invite many of the young population from these countries to Canada to complete degrees and to get to know and understand Canadian dynamics a little better. Not only is there social development that allows them to attract additional investment but also a real trade opportunity for Canada in these markets.
Senator D. Smith: It is interesting you raise that because when we were doing the Turkey report, we did hear about that. It was interesting that not all of them were necessarily top-level engineering schools. One of the community colleges literally has a full-time person over there in Istanbul that really has a dynamic going. Do you think there are opportunities of a similar nature in the Asian region for Canada and the educational institutions?
Mr. Winterhalt: Yes, absolutely. We would be starting from a position of strength. In general, Canada is seen in the region as having a very strong educational system — one that they seek to emulate. The University of Toronto, for example, is opening a business school in India. There are a few early steps into the region.
Senator D. Smith: Yes.
Mr. Winterhalt: Those will be replicated and seen as role models.
Senator Oh: How big is our presence in Singapore, since 2008? I met with the Singapore Ambassador to Canada a few months ago. He was telling me that the Canadian presence in Asian countries is still very small compared to Australia and the U.S.
Mr. Winterhalt: From an EDC perspective, we have chosen Singapore as our regional hub. My vice-president for all of Asia is positioned in Singapore not only because of the opportunities in Singapore but also the connection to the rest of the region and the opportunities to partner in particular with the banking community in Singapore, which is a very strong financial centre in the region. Singapore remains very critical from an EDC perspective.
We're co-located with our High Commission in Singapore, as we are in all our locations. They would see a very strong and increasing trend for more Canadian presence in the market.
I also believe that your observation is absolutely accurate that relativities are important in this discussion. Certainly vis-à-vis the Australians and Americans as you indicate, Canada would not be, at this point, in the same league — in the case of Australia largely because of proximity and the Americans perhaps because of the diversification of sectors and a longer historical footprint in the area.
We do see very strong growth rates, in particular on the investment side, which for us is a precursor to additional trade and export to the market. I would see it as a good news story and something that we are getting better at.
Senator Oh: Great.
Recently you sponsored the Canada-ASEAN Business Forum. How well has that gone?
Mr. Winterhalt: The first one ever was done this year. EDC was a founding sponsor. ``Extremely successful'' was the feedback from government and the private sector presence in the region and Canada. This was funded through all board members on the Canada-ASEAN Business Council. It was on a cost-share basis across the group.
Senator Oh: Does our trade commissioner in Singapore have a strong presence in the various countries?
Mr. Winterhalt: Yes, Canada does have a very strong footprint in the ASEAN region. I can't answer your question specifically, not being an employee of the Department of Foreign Affairs. However, I note that just this week, the government released its Global Markets Action Plan, a renewed global commerce strategy, in which many Asian markets are included on their priority list going forward. I know they have a strong priority attached to those markets.
Senator Downe: I want to be clear about your presence in the region. You have your hub in Singapore. How many people do you have in Singapore?
Mr. Winterhalt: EDC's operations tend to be fairly modest. Most offices would have only two individuals on staff. In the case of the Singapore office, as it is a regional hub, there would be five employees: two Canada-based and three locally engaged staff.
Senator Downe: In other countries in the region, would you have one person or two people?
Mr. Winterhalt: EDC has a bit of a different model from the Trade Commissioner Service. The Trade Commissioner Service, as you may know, would be present in 160 cities around the globe, including cities in Canada. EDC is present in 33 cities, 16 of those being international. In the Asia region as a whole, we have offices in Singapore, two offices in India and two offices in China. In the ASEAN region to date, Singapore is our only operation.
Senator Downe: You have no one in Indonesia, so they are serviced out of Singapore.
Mr. Winterhalt: That's correct.
Senator Downe: Do the three locally engaged people travel in the region as well?
Mr. Winterhalt: Certainly, yes. Each staff member would have responsibility for a set number of additional markets to develop business plans, travel and engage in those markets over the course of the year.
Senator Downe: Would those five include administrative support?
Mr. Winterhalt: They do.
Senator Downe: That person wouldn't travel.
Mr. Winterhalt: That's correct.
Senator Downe: At the most, you would have three to four people covering, with the exclusion of China and India, all countries in the region.
Mr. Winterhalt: That's correct. In addition to support staff who travel from Canada on occasion to the market, our folks in market have a business development mandate. On the more financial side, we would have additional underwriters and others such as risk analysts who would travel to the market in addition to those folks.
Senator Downe: What percentage of the budget of International Business Development is focused outside China and India in the ASEAN region?
Mr. Winterhalt: We would divide it one third, one third, one third across the three poles.
Senator Downe: One third India, one third China and one third other.
Mr. Winterhalt: ASEAN, yes.
Senator Downe: You mentioned earlier the importance of Indonesia with 250 million people and a growing economy. Why would we not have people on the ground there on a permanent basis? Is that a budgetary restriction?
Mr. Winterhalt: I would say it's a combination of factors, senator.
Initially when we looked at the market, we factored in the ease of doing business. Back in 2004 and 2008 when the decisions were made on where to locate, Indonesia was a very different place at that point in time. The governance angle, regulatory, legislative frameworks have greatly strengthened since that point in time. So when the decision was made almost six years ago for Singapore, frankly it was a straightforward decision to make with the ability and the ease to travel fairly frequently to markets that were showing growth and development both on the political side and the economic side.
In addition, Singapore, being English-speaking and given some of the traditions there, the presence of the banking community made it an easier play for EDC as a financial services provider to attach to Singapore versus Jakarta, for example.
Senator Downe: You indicated your budget for the ASEAN region is split a third, a third, a third. What percentage of your overall budget is focused just in the Asia region, excluding India and China?
Mr. Winterhalt: If you looked at the entire Asia budget, my team is divided into four general —
Senator Downe: No, your overall budget for International Business Development.
Mr. Winterhalt: We're divided into a number of regions, Asia being one, Africa, Europe, the Middle East, North America and South America. Asia would actually have a greater proportion of budget and human resources assigned to it because of the opportunities and the growth we see present there. Instead of a quarter of our budget, it would be closer to 30 or 32 per cent.
Senator Downe: Given the figures you indicated in your presentation, where is the growth?
Senator Downe: Globally or within Asia?
Senator Downe: Within Asia. With that percentage of the budget, I don't see the corresponding growth.
Mr. Winterhalt: We would see the growth being the strongest in the ASEAN region going forward. China is slowing, India being a second place position in terms of those being the three major hubs. While we perhaps won't have a physical representation in the Asian space outside of Singapore, we would have the ability to reallocate and divert additional funds and human resources to where we see the growth coming.
We tend to also be a bit of a leading indicator. Our view would be that we need to help prepare Canadian exporters and investors for where the opportunities will be, not where they are today. We would actually be, and have already, started putting a greater amount of our human and financial resources towards the ASEAN region.
Senator Downe: You have been doing that for how long?
Mr. Winterhalt: For about two years now.
Senator Housakos: We all appreciate and know the difficulties of doing business as Canadian companies in the Asia- Pacific region due to distance, language, cultural divides and vastly different governance reflexes between Canadian companies and companies in that region. I think it would only be normal that companies like the SNCs and the Bombardiers of this world have the financial wherewithal to participate and play in that marketplace. Can you give us a picture and breakdown of what percentage of your business partners doing business in the Asia-Pacific region are multinational or large national corporations compared to medium-sized businesses here in Canada? At the end of the day, medium- and small-sized businesses in Canada are the backbone of the economic growth and give you that gravy at the end of the year when you are compiling GDP and trade with your partners.
That's my first question, if you can just give us a breakdown.
Second, what are the challenges right now in the Canadian service industry in the Far East? Again, that's a sector that has grown rapidly in our trade with the United States, the EU and other trading zones and was underestimated a decade or two ago. Now it has become a pillar of our economic growth.
The third question is a follow-up to Senator Downe's question. Can you tell us, in terms of numbers, what you are spending in the EU section supporting your partners and doing business there compared to Asia-Pacific region?
Mr. Winterhalt: I will start with the first question in terms of the split between larger companies and small- and medium-sized enterprises. There are two ways to look at that. There's a raw dollar number, a volume perspective as we often do, but there's also looking at the number of transactions, partnerships or investment dollars flowing into the market. I think it paints a different picture. What I mean is that as you can imagine, if Canada is supporting, financially or otherwise, the operations or efforts of our global champions like Bombardier or potentially Hatch and the others you have mentioned, you would see greater dollar flow there, and those often get the headlines.
What's more interesting, though, from my perspective is the number of transactions and the investment dollar change. This tends to signal where you are seeing more presence of small- and medium-sized enterprises.
By way of example, you may have 20 companies who have their first export outside of a traditional market like the U.S. or the EU into Asia, but it might be relatively small in size — $1 million, $2 million or $5 million. It might take 20 of those to match up to one aircraft order that someone would receive. So the transaction count is important. When we look at it that way, the majority of the companies that EDC supports are in the small- and medium-sized space going into Asia, and ASEAN markets in particular.
One of the strategies we've used at EDC to try and help develop that is through our partnerships with the large companies in these markets. For a company like San Miguel in the Philippines — that is across multiple sectors and is a very reputable, creditworthy, strong, family-owned firm, but well-known in the Philippines — through an EDC-San Miguel partnership we can then open doors for smaller companies to get access to the procurement officers. A company like San Miguel can help stimulate flow of the smaller companies instead of it needing to be a large company that makes that one big sale. We spend a lot of our time and energy, as you suggest, helping that backbone of the Canadian economy in the small- and medium-sized space. We see that being the area of greatest growth going forward, given what our Canadian companies are doing in that segment.
With respect to the services industry, we see a fair amount of opportunity there. But because of some of the challenges you mentioned in your earlier observations around cultural differential, language, regulatory, business culture pieces, there is a little slower growth trajectory than within India, for example. You essentially have a common language and a bit of similarity in terms of a former colonial structure and business culture. There are still some challenges in India, but from a services perspective, there is a little more alignment there.
So to the honourable senator's question on whether there is an opportunity for additional education to help close the gap and open more opportunities for additional service industry growth and export or investment, I would say yes, but right now it is slower than we have seen in the other two major poles in the region, those being China and India.
Lastly, if I understood your question correctly, a relative comparison of EU versus Asia, and in particular ASEAN markets, I can view it only from an EDC perspective, and there we have always been focused on emerging markets from an EDC perspective. That's been our mandate for well over 10 years now.
For developed markets, while we certainly do service them out of Ottawa, the international group focuses only on emerging markets by and large, with the exception of how we can utilize European companies in terms of their supply chain or value chain.
So could we, through a relationship in Europe with a company like Siemens or Deutsche Telekom or Vodafone, influence Canadian supply that would direct it into emerging markets? That's how we've traditionally developed emerging markets like the EU. I know that's not a satisfactory answer but in short strokes, I would say our dollars and financial resources are very strongly devoted to the emerging market space and not to the developed market space.
The Chair: I have a few questions to pose. You said that it's advisable to have a local partner understand the culture, perhaps the language, et cetera. We have done a lot of geographic studies and it seems that's the continuing theme, so there's nothing unusual about you saying that for the ASEAN market. It was the same going into the Middle East, the same into Russia, the same into Latin America and wherever else we have looked.
Is it a recurring theme that this is a shortage or a misunderstanding or a lack of understanding by Canadians who want to do business abroad, or is this general for all other countries? What I'm getting at is this: Are we developing in Canada a culture of understanding how to do business overseas? Is there a lack in our academic system or in our business councils to prepare people so that it's obvious, instead of having it come to us as an impediment to Canadian business?
Mr. Winterhalt: I have a couple of observations. I would say it is a recurring theme. At the EDC it is something we see year in and year out, almost market by market, certainly in the emerging world. Part of that may be a lack of understanding really early on with respect to the challenges that Canadian companies will face as they venture, in many cases for the first time, out of what we would call a traditional market.
With respect to understanding how to do business in the U.S., while it would have a nuance quite similar to how they would do business here in Canada, the EU may be slightly different, even with an after-partner like Mexico — a great deal of comfort, I think, in terms of how things happen. It is maybe a false sense of comfort to say that if I can be successful in the U.S. or in Mexico or in Germany, it is the same regardless where I go. That often proves not to be the case, to your point, and the emerging markets you've illustrated are all great examples of that.
I think we are, as a country, getting slightly more sophisticated in our understanding of the differential. But working against us is the Internet generation, or the technology now in front of us, where I think people believe that they can do the research they need to do online, sitting in front of their computer, in a couple of days' time and that it will be enough, that such will suffice.
At the end of the day, nothing replaces getting out to the market — as we would say, ``boots on the ground'' — and having local legal representation, making sure you understand the environmental and the labour standards, and making sure you have a representative who understands the business dynamic. That piece is still lacking a little bit, in my opinion, in terms of companies looking to exit the traditional markets and go into the emerging space for the first time.
I am aware that many academic institutions across Canada are changing their view in terms of how to do that. In particular, I recently had an engagement with Queen's University, very much looking at how they structure, not a diploma course, but a couple-day course around helping small- and mid-sized Canadian companies better understand the challenges and how they're different from those they face in the U.S. and other Western markets. There is definitely room for continued growth in that space.
Lastly, I would say it is not unusual vis-à-vis our counterparts in Western Europe or the U.S. Many of those companies exporting for the first time to those markets would encounter the same challenges, and I think you would find the same themes in those countries.
The Chair: We studied China as part of the BRIC expansion that everyone was caught up with. More recently we've heard that some of the opportunities in China have now moved elsewhere because of the costs, as you pointed out. Are you tracking that to see where the next opportunities are? People said, ``Go to China because of the expanding markets there and the cost of labour.'' More recently we've heard that they've moved farther south, and if so, are you tracking that? Which countries seem to be next on the horizon as a good opportunity?
Mr. Winterhalt: We certainly do track that evolution of growth and, again, it is very common. We don't just see it in Asia, but we saw it actually play out a decade ago even a little closer to home, in Latin America and South America. In the past, you would see companies go to Brazil, for example, to set up operations to service the South American market. But as Brazil has seen an economic growth and an increase in its purchasing power, it became a more expensive location in which to manufacture. So we saw companies start to exit Brazil and look elsewhere in South America, whether it was Peru or into Colombia — other locations for the very same reason.
Certainly we do see that in Asia. Your observation is correct: It tends to be moving farther south — so from India and China into a number of these markets, often Thailand, Vietnam and the Philippines as new destinations for folks to set up their manufacturing base to service either the rest of Asia or even global, beyond that.
It has led not just the EDC, but certainly much more broadly, to reconsider the old BRIC appellation. It has changed, and you can hear all kinds of new versions come out, from CIVETS to the Next 11, and all kinds of different lists.
The most interesting one I have heard to date, and one that holds a lot of water from my perspective, is called TIMBI. It was first put forward by a professor named Jack Goldstone writing in Foreign Affairs about a year ago. It includes Turkey, India, Mexico, Brazil and Indonesia. What's interesting for me there is that it is a mix of some of the BRIC countries with some of the new emerging markets we see. So we would certainly see Indonesia having a role as one of those leading markets, as well as countries like India, from that region, and Brazil. They very much remain drivers of growth globally going forward.
The Chair: In most of our studies, somewhere along the line the opportunity comes up to talk about Canadians coming from those regions as being a great resource, and one that should be supported more. What do you do with, say, Canadians of Indonesian background or Chinese, et cetera? Are you aware of any increasing trends in reinvesting from the countries you or your family came from?
Mr. Winterhalt: Not particularly. It would be more anecdotal evidence. However, as we engage with Canadian companies that are for the first time looking to explore new markets, there is a correlation between the success factors of companies that have expatriates or diaspora represented on their board or in the management team — just a better understanding of how business actually gets done in a market like Indonesia or Vietnam. So we would see a correlated success rate there, but in terms of trend and analysis, I would defer to my colleagues at Citizenship and Immigration Canada.
Senator Johnson: In 2012 EDC released a publication on financial crime, warning business owners that they might be involved in financial crime without their knowledge. I know that is a concern for many business people when they are in other markets. What about Asia? What are the greatest threats there in terms of business and getting on the ground? Does EDC provide Canadian businesses with that kind of assistance or information? Would they find a lot of it in your reports, or do they come to you? I personally know people who have been affected this way. Obviously it is a challenging place to work and get set up and to establish a presence.
Mr. Winterhalt: Certainly it would be one of the risks that I think most companies would be well advised to be aware of in any emerging market, including those in Asia that we have been talking about today.
From our perspective, with respect to the ASEAN markets in particular, we would see corruption being probably the top business and non-business risk in market.
Second would be the sometimes uneven application of regulation or legislation for companies in a market. What I mean by ``uneven'' is that often domestic firms will have preferential treatment vis-à-vis taxation rates or tariff rates, things of that nature, that a foreign company may not have in a given market.
We have certainly seen enough cases to be very cognizant of those risks. EDC, as a financial services provider, in particular has to be quite careful. Obviously we're very much aligned with the Canadian foreign officials act in terms of being aware of what bribery means from an exporter and investor perspective. Wherever possible, we refer our clients also to the Trade Commissioner Service, the Department of Foreign Affairs and International Trade, local business associations, either government-to-government, like the Canada-ASEAN Business Council or even an industry perspective, to get a much more accurate read. That would be a little out of our remit, but we would counsel folks to ensure that they had that fully understood and, to every degree, mitigated.
Senator Johnson: So the regulatory side is critical in terms of understanding, like it was when we were in Brazil, constantly being told to have someone on the ground to work and represent you as you enter into any situation there.
Mr. Winterhalt: Yes, agreed. I think it's also about expectation level. Having that knowledge ahead of time, as a Canadian company, understanding that these are the challenges that will be faced and that they come with their own cost, both financial and non-financial, in terms of time, really does help ease things as well. The local partner piece is critical, but it's sometimes that mismatch and expectation level that causes the most concern.
Senator Oh: I just want to make a few comments. Your decision to move to Singapore was a very good decision, as Singapore is in the Commonwealth and is also a garden city. It is the safest city. All of the EU countries and the Americans set up head offices in Singapore. Singapore is very similar to Toronto. Within a one-hour flying time, you can get into Kuala Lumpur, Indonesia, and Vietnam. It's really a hub.
The EU set up their follow-up with a similar system to what we have here in our Commonwealth.
Another thing is that my friend is the largest Nike manufacturer for sports clothing. They have shifted their manufacturing from China to Vietnam and Cambodia and are facing big problems. They face a skill problem in Vietnam and Cambodia and a big problem with corruption.
In China, they use one worker. In Vietnam and in Cambodia, they need three workers to do the same job. They had some problems there. They thought they could save some money, but the costs are not much different.
The Chair: I take it there's no question there.
[Translation]
Senator Fortin-Duplessis: Mr. Winterhalt, I imagine that you and your colleagues participated in the Canada- ASEAN business forum, an initiative of the Canada-ASEAN Business Council, which was held for the first time in October 2013. In your opinion, what will the benefits be for Canadian business people, over the short and long term?
[English]
Mr. Winterhalt: Perhaps just to clarify, are you referring to participating in that business association or more broadly than that?
[Translation]
Senator Fortin-Duplessis: When you participated in the forum, in October 2013, I imagine that EDC representatives were present?
Mr. Winterhalt: Yes.
Senator Fortin-Duplessis: In your opinion, what benefits can Canadian companies expect over the short and long term?
[English]
Mr. Winterhalt: Certainly I think there is a significant benefit for Canadian companies in participating in associations such as the Canada-ASEAN Business Forum or Business Council. For me, it's almost a little surprising that this was the first occasion to do something. I'm happy to say that EDC was a founding member of the association. My colleague, the regional vice-president for Asia, was the chair of the committee this year, and we certainly do see value, both short term and long term, in participating in that kind of forum.
The initial short-term lift or benefit to Canadian companies is really just the network that they're exposed to. The initial opening ceremony was attended by over 400 public and private sector officials and was a real opportunity for Canadian companies to see decision makers on the government side, as well as some of their target firms they hope to do business with and to get into their supply chains, in one location and to be able to really network. That would be the short-term benefit that they would see.
Again, it tended to be more heavily represented by the big five nations in the ASEAN space — Indonesia, Thailand, Malaysia, the Philippines and Vietnam — and focused on those five in particular, but a number of smaller nations — Brunei, for example — were also represented. There was a good cross-section of both country and sector presence there.
In the short term, that network is essential. Like any emerging market, long-term success will really be driven by the perseverance and the patience of the Canadian company to follow up on those relationships that may be first established through a forum of that nature. Are they willing to go to the market repeatedly to continue to engage the contacts that they've made? Asian business culture is not dissimilar to Latin in many ways. It is based, to a large degree, on personal relationships. So that first meeting or presence in a forum such as that is helpful, but it's only the starting point. The company really needs to leverage those introductions and to continue to visit the market and to adapt both their staff engagement and their product line to make it a good fit for the buyer they're hoping to target. I would address it in that way.
Senator Downe: What EDC's assessment of Burma?
Mr. Winterhalt: It would be one of the last true frontier markets. I guess that's how I would describe Burma. Frankly, we are still in the analysis and information-gathering stage in many respects as we've slowly started to see an opening of the country and a change in our own government's position to the market. It is an absolutely fascinating environment, though. I think that in the near term, not in the long term but in a three to five-year span, we will see it eclipse many of the other markets in Southeast Asia in terms of potential. I've already been told that real estate prices in Rangoon, for example, are more expensive than in London, England. We're seeing a huge lift there and a real opening in interest from those leading international firms who are perhaps more sophisticated or more able to mitigate the risk of moving into that space. With a market approaching 80-plus million people, it has a certain scope already present. Certainly, the purchasing power of the individuals within Burma is quite limited, so it will take some time to get traction, but it's near term, not long term.
Senator Downe: You mentioned the last of two frontiers. What is the other country?
Mr. Winterhalt: There may be others, I guess. It is one of the last ``true'' frontier markets.
Senator Downe: Oh, ``true''; I thought you had said ``two.''
[Translation]
Senator Robichaud: You help Canadian companies find new markets for the products they export. Do you also help people who want to establish themselves in that region and manufacture products that they export in order to take advantage of the labour, which we are told, is inexpensive? Is that also part of your mandate?
[English]
Mr. Winterhalt: It certainly does. Again, we take a view of integrative trade, being a little more holistic than simply what would be a traditional export relationship. The world has evolved from supporting an exporter and investment from one point or another.
Last year, for the first time in Canadian history, we had more economic activity generated by Canadian subs abroad to other markets than we did from Canadian companies based in Canada outward. That's never happened before, but that was seen to be a trend that was coming, and it continues to accelerate. So from an EDC perspective, we evaluate where we should provide our support based on Canadian benefit, which is a slightly broader definition that asks: Is there value? Is there a benefit that accrues to Canada, whether it in terms of increased revenue, dividend repatriation or additional opportunities for investment that go out that tend to generate a much higher economic benefit than a straight export to one market?
So, absolutely, we do look at how a Canadian sub in a third market may shift manufacturing facilities there to take advantage of a cost advantage and then onward to a third market. That would still very much be something where we would see a great benefit to Canada and where we would support that activity.
[Translation]
Senator Robichaud: When you advise people who want to take advantage of inexpensive labour, you tell them that they must respect labour standards. But do they really pay attention to that? We only realize that those standards were not respected if there is a serious accident such as the one that happened in Bangladesh. Are people really warned about that kind of operation?
[English]
Mr. Winterhalt: Perhaps just a quick observation: EDC would not find it within its mandate to advise or to counsel a company in terms of their business plan. Whether they would find a benefit individually in terms of their cost of manufacturing, which may include labour, beneficial to them, EDC would not feel it is part of our mandate to advise them there. If they've already taken that decision and they come to us with a business plan that may include third- country production, before issuing any kind of financial instrument or support, we would absolutely ensure that from a CSR perspective, which includes the labour element, they meet Canadian standards. That said, we do not then go into a review of a market-by-market operating platform or policy but do, upon the occasion of renewing a financial product or service, absolutely ensure at every stage that they are following our rules and regulatory environment here in Canada before we would issue any additional financial support.
The Chair: I think we're over our time. I thank you for staying, Mr. Winterhalt. The questions, as you have seen, were of a broad range, but you certainly helped us in focusing our study and identifying the issues, particularly on the trade side. That's going to be very helpful for us in strategically narrowing what we believe we can add value to in the debate about business and foreign policy towards countries within the ASEAN area. Thank you very much for coming. If we need some follow-up, perhaps we'll be in touch with you later.
Senators, I have one further issue. I did appear before the Finance Committee, filed your report, defended what we said and did make the informal comment that we found it difficult to have immigration issues in an omnibus bill. I recommended that that be included somehow in their report when they finish, so I think we've discharged our duty on Bill C-4.
(The committee adjourned.)