Managing A Case for Product Development

The 1985 report to the federal government by the McDonald Royal Commission on the Economic Union and Development Prospects for Canada stated: “In the past, research and development (R&D) in exploration, mining, smelting and refining techniques did much to keep the Canadian mining industry competitive. In recent years, however, only the aluminum industry has invested significantly in R&D for process innovation. In the other mineral sectors, R&D expenditures have been very small, a crucial need in light of the many substitutes for metals being introduced.” In its submission to the royal commission, bp Selco observed that the mining industry “must expand research into exploration and mining technologies” and “must look for new markets and applications” for its products.

The need for increased levels of R&D expenditures is not limited to the mining industry. Generally, industries in Canada invest much less in R&D than do similar industries in developed countries. We are a country that has never had to aggressively develop and sell sophisticated products to the world. Instead we have relied on our production and sale of commodities (lumber, minerals, grain, oil, etcetera) as the basis of our economic strength. However, this “easy” road will not work as well for us in the future. Canada’ s once healthy balance of trade with Japan has been steadily declining in recent years. It has slipped to a $400-million negative balance in 1985 from a $1.5-billion positive balance in 1980. This decline reflects the reduced demand for our raw materials and the increasing demand for the higher technology products which we do not produce. It is especially striking to note that Canada’s balance of trade with the world becomes worse as one looks at products with progressively higher levels of technology.

In a past address to the Canadian Association of Physicists, Dr Stuart Smith, chairman of the Science Council of Canada, commented on this problem. During a tour of Japan, he found that the larger Japanese industrial companies spend 5%-6% of total sales on R&D. This figure does not include “process R&D” but only “product development R&D.” Dr Smith states that, in Canada, most of the research performed by industry is process R&D and that this expenditure is rarely above 1% of sales. Dr Smith also noted that tax relief or R&D expenditure in Japan is much less generous than in Canada. He says Japanese companies realize that “you don’t live for this quarter’s bottom line, but you must make sure that your company stays in business for the next 20, 50 or 100 years and that is why you do research.”

Traditionally, Canada’s mining companies have been highly skilled in finding ore and getting material out of the ground. The high level of expertise falters, however, at the marketing and product development end. The recent recession has forced companies to develop new process technology in order to become more efficient producers. However, new product development by the mining industry has been limited. Several larger Canadian mining companies have been active and highly successful in developing new forms of their metal products to improve transportation and storage (e.g. pelletization) and in developing new alloys and metal-smelting/refining techniques. However, R&D into end-product uses has been very limited and the industry, in general, has made only minor attempts to manufacture end- products.

Metals do not have any markets today that are guaranteed for the future. Metals are in constant competition with other materials, which can often be produced at much less cost. As Peter Drucker stated in a recent article in Foreign Affairs: “Industrial production is steadily switching away from heavily material-intensive products and processes … The raw materials in a semi-conductor micro-chip account for 1%-3% of total production cost … In older industries, the same scaling down of raw material need goes on … Fifty to 100 lb of fibreglass cable transmit as many telephone messages as does one ton of copper wire … Thus it is quite unlikely that raw material prices will ever rise substantially compared to the prices of manufactured goods (or high-knowledge services such as information, education or health care), except in the event of a major, prolonged war.”

Japan sets the research agenda for industries of the advanced world. This research is directed towards relieving Japan’s dependence on foreign raw materials by developing:

* products which consume less energy and fewer resources, and

* cheap engineered materials for traditional resource-based ones.

This research agenda is opposed to Canada’s interests as our country sells the resources that the world is learning to avoid using.

This trend toward less resource consumption will have dramatic implications for Canada in the future. Canada today has more than 800 single- industry communities containing 10% of our population. The drying up of markets and the lowering of prices for our country’s major commodities could force the closure of many of these communities and render large areas of our country devoid of settlements or developments. Canada does not have a strong tradition of industrial R&D. Many of our manufacturing industries are subsidiaries of U.S. companies, with R&D usually being carried out in the U.S. Our universities have excellent people, but lack of funding is holding back the needed upgrading of research facilities. Since, in Canada, there has been little feedback from the marketplace to industrial R&D programs and to university R&D programs, the result has been unco-ordinated and unfocussed research efforts.

Walter Curlook, newly elected president of the Mining Association of Canada, is trying to correct this problem. As described in the June issue of The Northern Miner Magazine, his association has proposed creating a Canadian Institute of Advanced Mineral and Metal Technology (ciammt). This institute would involve several research centres, housed and staffed by universities. Funding would be shared by government and industry and research would be focussed on the issues facing the mining industry. This initiative parallels similar efforts to create more focus and co-ordination of research efforts at the Colorado School of Mines, the Massachusetts Institute of Technology and Penn State University.

The example of the aluminum industry provides a good blueprint for how mining companies should improve their product development efforts. Alcan, Alcoa and Reynolds all give prime coverage to their product development efforts in their annual reports.

Alcan, after losing $180 million in 1985 (down from a profit of $253 million in 1984), increased its 1985 R&D expenditures to $77 million from $66 million in 1983. The company has set its sights on the goal of having 25% of sales in the 1990s from aluminum products it’s not yet making.

Alcoa states in its annual report that its corporate goals include:

* developing new products,

* developing state-of-the-art technology,

* making advances in materials development to compete aggressively with other materials,

* adding value to products already made, and

* pursuing high-margin products.

The following are just three examples of the many new uses for aluminum being developed by the aluminum producers:

* asceptic packages, which provide long shelf-life for perishable products while preserving freshness;

* lithium-bearing aluminum alloys, to reduce airframe weight by 10%-15%, saving a typical airliner five tonnes, or 220,000 gallons, of fuel a year; and

* aluminum rail hopper cars for coal unit trains, which replace steel cars to improve payload by 20%, reduce fuel consumption and reduce track maintenance.

The aluminum companies will themselves manufacture many of the new products they develop.

Canada, perhaps more than any other industrialized country, depends on raw materials, including minerals, to support its economy. Canada should therefore take the lead in developing new product uses for metals in addition to more efficient production processes. This will be
one of the primary challenges of the mining industry in the future.

William Stanley is director of national mine services at Coopers & Lybrand Consulting Group.