Clean tech sector urgently requires national leadership to stem global market erosion

Policy void placing damper on growth

Canada's vibrant clean tech industry urgently requires federal leadership and policy direction if it is to avoid being overtaken by other nations, concludes a new report on the sector. Despite years of impressive growth, job creation and penetration of global markets, the sector writ large is actually losing hard fought market share to nations where governments have taken more aggressive policy and programmatic action.

According to the report's observations, Canada's federal government is absent on the clean tech file in areas where enlightened policies, regulation, trade and competition policy and above all leadership would be beneficial. Such actions would greatly enhance its ability to continue a torrid growth rate while maintaining the market shares it has achieved to date.

Based on primary and secondary research as well as a scan of the global market, the report by Analytica Advisors warns that without acting on a suite of seven recommendations, Canada's homegrown clean tech firms could become the focus of a wave of foreign takeovers similar to those that struck the biotechnology, telecommunications, sat-ellite and fuel cells industries.

"Innovation-based firms are a part of the economy that is not well understood. There are things that can be done without large program dollars," says Celine Bak, president and CEO of Analytica Advisors and the report's author.

The 2015 Canadian Clean Technology Industry Report is the fifth iteration Bak has produced, with the major addition this year being an analysis of Canada's global market share ranking.

On the surface, the clean tech sector appears to be doing well — it has emerged as one of Canada's largest tech-based sectors in a relatively short period of time. More than 800 firms employ in excess of 50,000 people generating exports of $12.5 billion in 2013. Such critical mass and export sales lead the report to conclude that the sector has come of age, but since the global recession of 2008-09, Canada's ranking and share of the global market has slipped significantly.

"Canada's global share of Environmental Goods is steadily declining and we are the world's third greatest loser of market share since 2008. If water related goods are excluded, Canada wins the prize as the world's greatest loser of Environmental Goods global exports market share since 2008." — 2015 Clean Tech Report

Between 2008 and 2013, Canada's ranking fell from 14th to 19th and market share slipped 41% from 2.2% to 1.3%. At the same time, China has rocketed to the top of the list with an 83% increase in exports, closely followed by Korea which boosted exports by 81% to capture the #2 spot. Of the nations that lost market share, Canada's poor performance was exceeded by only Japan and the UK.

Bak says Canada's place in the world needs to be quantified by better data, which currently exists in piecemeal form . It would benefit from the kind of robust policies and patient capital experienced by sectors such as aerospace. Clean tech is currently Canada's fastest growing technology industry but its ability to retain that position remains uncertain, leading Analytic Advisors to question the likelihood of its 2011 projection of a $50-billion industry by 2022.

"This sector has no dedicated minister or ministry," says Bak, explaining that responsibility is split primarily between Industry Canada and Natural Resources Canada. "It needs government leadership and industry must organize itself. There's currently no national industry association."

Ironically, the industry's strong R&D performance is cited as a contributor to the potential diminishment of the sector. The report notes that the industry collectively spent $6.4 billion on R&D between 2008 and 2013 (including $4.5 billion spent by small- and medium-sized enterprises). R&D outlays now account for more than 10% of revenues, leading the report to caution that an "R&D bubble" may be developing that could result in the formation of an innovation backlog.

"Are these firms making themselves into the classic takeover target for foreign-owned companies who can then profit from Canadian investments in innovation?", asked the report. "This industry does not present the classic profile of large companies engaged in R&D to enhance well-established competitive positions in competitive markets ... This is an industry that consists of young firms establishing new franchises in sizable niche markets through investments on a number of dimensions, including R&D, sales and marketing."

Not all of the sector's challenges lie with government. The report notes that clean tech companies also require improved access to financing – both equity and debt – and academia must take steps to ensure that the thousands of new jobs opening up can be adequately filled. Between 2012 and 2013, industry employment grew by 9,000 or 21% to 50,000, exceeding direct employment in the forestry and logging industries as well as pharmaceuticals and medical devices.

For fast-growing firms, it's incumbent that they keep their focus strongly on dominant global positioning to counter a trend towards focusing purely on global niches. The report says companies appear to be "refocusing their attention away from dominating global markets" at least in part due to "difficulties in securing globally competitive levels of debt and equity financing". Such a shift could result in the sector losing its momentum, placing the onus on policy makers to "use all the levers available to them".

"Government policies that pull innovation into markets may include regular reporting on sector performance within the Canadian and global economy, inclusion of the sector in trade discussions and consultation with the sector on intellectual property protection," states the report.

The report notes that countries such as Germany and Belgium have a high degree of federal-state cooperation while Japan uses regulatory reform as a platform for engagement with potential industrial customers.

FMI: www.analytica-advisors.com.

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