Status of the Auto Industry and a

Strategy to Make Canada a Product Development Hub

Peter Frise – CEO, AUTO21 Inc.

May 2013

Presentation Outline

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Introduction:

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Present Status of the Global Auto Industry; Ontario’s Place Within the Industry The Value Chain – Who Does What?

Major Technological and Commercial Trends

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The Key Challenges We Face

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The competition

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A Solution for Consideration

Global & North American Automotive Sales & Production

~105M in 2020

Global vehicle assembly capacity is about 30M units

too high!!

The Value Chain – Who Does What?

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The Auto Parts Value Chain Vehicle models are often assembled in multiple plants around the world (ex. the Toyota Corolla is made in 13 different factories in every global region);

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More than 80% of the parts in a given model are developed and manufactured by the same companies which must supply ALL of the assembly plants from parts factories located near to each assembly plant; Therefore, auto parts companies must be global – but their key activities in R&D and product development are vital because they generate the highest value employment;

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Building a business case in the auto parts sector to attract those product development activities is the key to ensuring a healthy manufacturing sector in the future.

Technological Trends and R&D in the Automotive Industry

Global and Canada

32 Years of Automotive Progress

Curb Weight 0-60 Time EPA Fuel Economy

1981 Ford Escort

1100 kg.

15.1 sec.

23 mpg

2013 Ford Focus

1400 kg.

8.3 sec.

31 mpg

PLUS: the Focus has fuel injection, cam-phasing, airbags, ABS brakes, HID headlights, air conditioning, PW/PS/PB, power seats, heated mirrors, satellite radio, Bluetooth phone, etc. AND it starts every time, it goes, turns and stops better, it is quieter, it does not rust and it costs less in 1981 dollars than the Escort cost in 1981.

CAFE REGULATIONS

– Complex but mandatory for future light duty vehicles of all types & sizes

100% change in 15 years!

Global & Canadian Auto Sector Innovation Metrics

How does Canada’s auto sector compare globally in R&D and product development investment?

Growth in Global Automotive Product Development Investments

Global automotive product development investment growth is more than 25% of new incremental spending which is second only to the computing / electronics sector and ahead of all other sectors.

Is Canada getting its share of this new investment?

AUTO $13.2

Data from Booz & Co. 2012 Global Innovation 1000

Auto Industry Statistics - Global

Global Light Vehicle & Parts Production Revenue Profit Margin R&D & PD $ / vehicle

2011

77.1 M OEM Supplier

$ 1.9 T $ 103.1 B 5.5% $ 392.1 B $ 96.8 B $1257 $ 15.8 B 4.0%

2012

81 M OEM Supplier

$ 2.0 T $ 95.7 B 4.8% $ 100 B $1235 $ 374.9 B $ 18.9 B 5%

The annual figure of approx. $1240 / vehicle in R&D and product development costs is certainly going to increase dramatically going forward to meet enhanced fuel economy, vehicle emissions and safety standards.

Source: Booz-Allen & Co.

Auto Industry Product Development Investments –

Comparing Global & Canadian Data

Global Canada Light Vehicle Production Product Development Expenditures Product Development Investment $ / car Light Vehicle Production Product Development Expenditures (est.) Product Development Investment $ / car 2011

77.1 M $ 96.8 B

$1257

2.12 M $ 425 M

$ 200 2012

81 M $ 100 B

$1235

2.45 M $ 500 M

$ 204

Product development investments in Canada’s auto industry are falling behind by a factor of more than six (approx. $200 / vehicle in Canada versus more than $1230 / vehicle abroad).

Data from Booz & Co. 2012 Global Innovation 1000, DesRosiers Automotive Consultants and Industry Canada

Auto Industry R&D in Canada & Abroad

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Global auto industry: intense period of innovation to meet new fuel economy requirements and enhanced safety standards; Huge amount of investment in R&D as automakers struggle to meet these challenges while recovering from the recession; Vehicle product development cycle means that major investments are required now to secure a place for new technology on the next generation of vehicle models; Product development investments in Canada have lagged other global automotive nations significantly; Canadian manufacturing operations are vulnerable to competition from abroad and it also means:

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Canadian investments in universities, colleges and public sector science organizations are not being effectively leveraged;

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Bright young people educated in Canada have fewer job prospects in R&D here.

Canada’s Place in the Global Auto Sector

Canada’s Auto Industry Statistics

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~ 8 light vehicle and 6 heavy vehicle assembly plants across Canada (incl. cars, trucks & buses > 10 OEM’s)

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Approx. 400 parts supplier companies Output – approx. 1.8 - 2.5 million vehicles/year Approx. $119 billion including parts & assembly Canadian employment is approx. 130,000 people + 300,000 indirect Canadian R&D investments approx. $500M-$1B/year Several large R&D centres are located in Canada.

8000 km Canada’s Auto Industry

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North American OEM HQ Locations

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Chrysler LLC – Auburn Hills MI

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Ford Motor Co. – Dearborn, MI General Motors – Detroit, MI Honda N. Am. – Marysville, OH Toyota N. Am. – Ann Arbor, MI Nissan N. Am. – Farmington MI All of which are within this little red circle

The Competition

2010 vehicle production was about 78 million units despite the slowdown in the US and Western Europe Mexico 2.4 M Canada 2.1 M U.S.

7.8 M S. America 4.4 M W. Europe 13.8 M S. Africa 449 K E. Europe 6.0 M India 3.5 M China 18.3 M Malaysia 568 K Korea 4.3 M Thailand 1.6 M Japan 9.6 M Indonesia 721K Australia 249 K

• Source: Global Insight

By 2015 production is expected to exceed 90 million units driven by a recovery in the U.S and continued growth in Asia. At present Canada is the only region not showing a projected increase in production

– we must change this picture!

Mexico 3.4 M Canada 2.1 M U.S.

11.2 M S. America 5.9 M W. Europe 16.0 M S. Africa 748 K E. Europe 7.8 M India 6.4 M China 25.9 M Korea 4.6 M Thailand 2.5 M Malaysia 681 K Japan 9.7 M Indonesia 1.3 M Australia 350 K

• Source: Global Insight

Automotive Product Development and R&D

– a Strategy to Make Canada a Product Development Hub

Innovation in the Canadian Automotive Sector

Where in the R&D and product development process does Canada fail to invest adequately?

Innovation in Canada’s Auto Industry

Increased Investment Needed

Conclusions and Take-Away Messages

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Automakers must greatly improve the environmental and safety performance of their vehicle offerings but 70+% of the vehicle technology comes from the auto parts supplier companies;

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Thus, auto parts suppliers must innovate to contribute to better safety and environmental performance of future cars – and they must do this now to be included on next generation vehicle models;

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Canadian investments in product development at $200 / car are a fraction of the $1200+ / car global average - we are simply not competitive;

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This work must be done in industry for reasons of speed and security and to ensure valid outcomes – and Canadian companies must participate or risk being dropped as suppliers;

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AUTO21 has surveyed 25 leading Canadian auto parts companies confirming that a direct investment program supporting R&D would address these issues.

Capacity for Growing R&D in Canada’s Auto Industry

(data from a recent survey of 25 Canadian auto parts firms by AUTO21)

Question

Canadian automotive R&D expenditures over the next 5 years R&D expenditures abroad over the next 5 years Ratio of R&D abroad / total company R&D Potential to move R&D to Canada with a direct assistance program Potential to grow overall R&D expenditures in Canada with assistance Anticipated growth/retention in R&D employment in Canada Estimated amount of direct investment program funding requests

Cumulative Response

$775.4 million $3141.2 million Varies from 0 to 92% (avg. = 30%) $141.5 million $197 million 480 R&D jobs $196 million / 5 Years

NOTE: No OEM data is included in the survey.

Proposed Rules of a new Direct Investment Program…..

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PROGRAM

PRIORITIES

Industry support & commercialization plan and capacity building determine project selection;

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FUNDING

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RECIPIENT

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REPAYMENT

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IP OWNERSHIP

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APPROVAL 50% industry & 50% program

Funds flow to industry for use in the project; Most program funding will be in a repayable loan; Industry will own the intellectual property; Project review & approval in days / weeks;

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DURATION

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MONITORING

Projects normally 2 years but may be shorter or longer; The company’s own internal monitoring process with external audits to trigger program investments;

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ELIGIBILITY

Canadian corporations and local subsidiaries of foreign companies which manufacture in Canada;

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Applicants must commit to do the R&D here and present a plan that shows a benefit to Canada.

Project Activities & Proposed Repayment Rules Supported R&D Activity Build a Prototype Component Program Funds Repayable?

Yes – once the component or

process goes into production

Hire New R&D Personnel in Canada No Purchase New R&D Equipment in Canada No – unless the asset is used

in commercial production

Contract Research at Canadian Institution No

Developing the best people and the best technology for the future of the automotive industry

www.auto21.ca

www.nce.gc.ca