Status of the Auto Industry and a Strategy to Make Canada a Product Development HubPeter Frise CEO, AUTO21 Inc.May 2013

Presentation OutlineIntroduction:Present Status of the Global Auto Industry;Ontarios Place Within the IndustryThe Value Chain Who Does What?Major Technological and Commercial TrendsThe Key Challenges We FaceThe competitionA 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?

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

1981 Ford Escort2013 Ford FocusCurb Weight1100 kg.1400 kg.0-60 Time15.1 sec.8.3 sec.EPA Fuel Economy23 mpg31 mpg

CAFE REGULATIONS Complex but mandatory for future light duty vehicles of all types & sizes100% change in 15 years!

Global & Canadian Auto Sector Innovation MetricsHow does Canadas auto sector compare globally in R&D and product development investment?

Data from Booz & Co. 2012 Global Innovation 1000Growth 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.AUTO $13.2Is Canada getting its share of this new investment?

Auto Industry Statistics - GlobalSource: Booz-Allen & Co.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.

20112012Global Light Vehicle & Parts Production77.1 M81 MOEMSupplierOEMSupplierRevenue$ 1.9 T$ 392.1 B$ 2.0 T$ 374.9 BProfit$ 103.1 B$ 15.8 B$ 95.7 B$ 18.9 BMargin5.5%4.0%4.8%5%R&D & PD$ 96.8 B$ 100 B$ / vehicle$1257$1235

Auto Industry Product Development Investments Comparing Global & Canadian DataData from Booz & Co. 2012 Global Innovation 1000, DesRosiers Automotive Consultants and Industry CanadaProduct development investments in Canadas auto industry are falling behind by a factor of more than six (approx. $200 / vehicle in Canada versus more than $1230 / vehicle abroad).

20112012GlobalLight Vehicle Production77.1 M81 MProduct Development Expenditures$ 96.8 B$ 100 BProduct Development Investment $ / car$1257$1235CanadaLight Vehicle Production2.12 M2.45 MProduct Development Expenditures (est.)$ 425 M$ 500 MProduct Development Investment $ / car$ 200$ 204

Auto Industry R&D in Canada & AbroadGlobal 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:Canadian investments in universities, colleges and public sector science organizations are not being effectively leveraged;Bright young people educated in Canada have fewer job prospects in R&D here.

Canadas Place in the Global Auto Sector

Canadas Auto Industry Statistics~ 8 light vehicle and 6 heavy vehicle assembly plants across Canada (incl. cars, trucks & buses > 10 OEMs)Approx. 400 parts supplier companiesOutput approx. 1.8 - 2.5 million vehicles/yearApprox. $119 billion including parts & assemblyCanadian employment is approx. 130,000 people + 300,000 indirect Canadian R&D investments approx. $500M-$1B/yearSeveral large R&D centres are located in Canada.

North American OEM HQ LocationsChrysler LLC Auburn Hills MIFord Motor Co. Dearborn, MIGeneral Motors Detroit, MIHonda N. Am. Marysville, OHToyota N. Am. Ann Arbor, MINissan N. Am. Farmington MI8000 kmCanadas Auto IndustryAll 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 Source: Global Insight Canada 2.1 MU.S.7.8 MS. America4.4 MW. Europe13.8 ME. Europe6.0 MIndia3.5 MChina18.3 MKorea4.3 MAustralia249 K Malaysia568 KS. Africa449 KThailand1.6 MMexico2.4 MJapan9.6 MIndonesia721K

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! Source: Global InsightCanada 2.1 MU.S.11.2 MS. America5.9 MW. Europe16.0 ME. Europe7.8 MIndia6.4 MChina25.9 MKorea4.6 MAustralia350 KMalaysia681 KS. Africa748 KThailand2.5 MMexico3.4 MJapan9.7 MIndonesia1.3 M

Automotive Product Development and R&D a Strategy to Make Canada a Product Development Hub

Innovation in the Canadian Automotive SectorWhere in the R&D and product development process does Canada fail to invest adequately?

Innovation in Canadas Auto IndustryIncreased Investment Needed

Conclusions and Take-Away MessagesAutomakers 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; 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;Canadian investments in product development at $200 / car are a fraction of the $1200+ / car global average - we are simply not competitive;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;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 Canadas Auto Industry(data from a recent survey of 25 Canadian auto parts firms by AUTO21)NOTE: No OEM data is included in the survey.

QuestionCumulative ResponseCanadian automotive R&D expenditures over the next 5 years$775.4 millionR&D expenditures abroad over the next 5 years$3141.2 millionRatio of R&D abroad / total company R&DVaries from 0 to 92% (avg. = 30%)Potential to move R&D to Canada with a direct assistance program$141.5 millionPotential to grow overall R&D expenditures in Canada with assistance$197 millionAnticipated growth/retention in R&D employment in Canada480 R&D jobsEstimated amount of direct investment program funding requests$196 million / 5 Years

PROGRAM Industry support & commercialization plan and capacityPRIORITIESbuilding determine project selection; FUNDING50% industry & 50% programRECIPIENTFunds flow to industry for use in the project;REPAYMENTMost program funding will be in a repayable loan;IP OWNERSHIPIndustry will own the intellectual property;APPROVALProject review & approval in days / weeks;DURATIONProjects normally 2 years but may be shorter or longer;MONITORING The companys own internal monitoring process with external audits to trigger program investments;ELIGIBILITY Canadian corporations and local subsidiaries of foreign companies which manufacture in Canada;Applicants must commit to do the R&D here and present a plan that shows a benefit to Canada.Proposed Rules of a new Direct Investment Program..

Project Activities & Proposed Repayment Rules

Supported R&D ActivityProgram Funds Repayable?Build a Prototype ComponentYes once the component or process goes into productionHire New R&D Personnel in CanadaNoPurchase New R&D Equipment in CanadaNo unless the asset is used in commercial productionContract Research at Canadian InstitutionNo

Developing the best people and the best technology for the future of the automotive industrywww.auto21.cawww.nce.gc.ca

*********TRL1 thru TRL3 universities & research institutes TRL8-9 factory production in industry.TRL4 thru TRL7 when new technologies are developed and demonstrated with physical prototypes: most expensive and risky parts of the processbut these phases are crucial to the development and marketing of new technologically advanced products.TRL4 through TRL7 is a clearly identified gap in Canadian innovation assistance programs as found by the Emerson Panel on the Aerospace Industry (Nov. 2012) and other reports.****