Roadmap to Recovery Innovation, Investment, & Growth Durham Economic Prosperity Conference November 5 th, 2010

Moving Forward Together StrengthsWeaknesses OpportunitiesThreats

Strengths Regional – Skilled labour – Airport with Canada Customs & Deep-water port (Canadian Port Authority) – Strong agricultural base & abundant land – 3 state-of-the-art educational & research institutions – World-class medical facility – Nuclear power – State-of the-art auto manufacturing & abundant production capacity – Quality of life, recreation, green space, nature, extensive waterfront Provincial – Proximity to customers, suppliers, world-class innovation infrastructure – Strong federal and provincial support for innovation and next generation technologies National – Competitively low business tax rates – Comparatively low levels of government debt – Comparatively strong financial sector

Weaknesses Regional – Road system – Job creation does not keep pace with population growth – Loss of industrial base Provincial – Uncertain, slow, costly, and at times impractical regulatory system – Reliable access to cost competitive energy? – Lack of a clear transportation plan – Lack of clear economic development objectives – Weak connections between innovation infrastructure & business needs National – Lack of a clear long-term economic/industrial strategy – Partisanship trumps policy – Highly leveraged consumer sector – Manufacturing and exporting sector highly integrated with the United States

Threats A Sustainable Recovery? – Global financial and currency risks – Unwinding stimulus Obstacles to Recovery – Strong and volatile Canadian dollar – Weak cash flow = limited availability and higher cost of business financing – Overcapacity in many industrial markets, corporate consolidation & loss of product mandates – Unfair trading practices, protective restrictions in export markets (Buy American) & aggressive use of investment incentives in the United States – Increasing mandatory overheads – fees, taxes & regulatory compliance costs – Thickening border – security, customs, regulations, fees, administration Game Changers – Changing customer requirements & expectations – Shift in market power & economic growth to emerging economies (China, Asia, Latin America) – Corporate restructuring & supply chain reorganization – An aging population – Skill shortages, increased demand for health care & retirement income with fewer people working & investing – Energy constraints & environmental priorities

Opportunities Challenges = New Business Opportunities – Changing customer requirements & expectations – Shift in market power & economic growth to emerging economies (China, Asia, Latin America) – New procurement & supply chain requirements = auto, energy, infrastructure, aerospace – An aging population = Productivity, products, services – Energy opportunities = energy efficiency, new processes, nuclear & alternative energy, oil sands – technologies, services, and manufacturing supply chain – Environmental priorities = clean technologies & services Technology Priorities – Energy – Smart grid, energy efficiency – Manufacturing – Auto, agri-food, aerospace, automation, design & engineering, resource processing – Environment – Clean technologies & services – Health care – Medical technologies & services New business opportunities in Ontario, across Canada, North America, and around the world.

Critical Questions Is manufacturing disappearing? What are the growth sectors? What do businesses/industries need to do to succeed and grow? What can Durham Region do to promote economic growth, generate high paying jobs, and sustain a high quality community?

Manufacturing in Canada Companies that produce things = A $540 billion business ($650 billion in 2008) – 13% of Canada’s GDP (16% in 2005) – 10% of workforce = 1.75 million Canadians (2.4 million in 2005) A highly diversified sector Manufacturing accounts for two-thirds of Canada’s exports Highly integrated with the US market – Approximately 50% of Canadian production is exported into or through the United States – About 40% of manufacturing inputs are imported from the United States 75% of business sector R&D 85% of new product commercialization Canada’s leader in GHG emission reduction (10% reduction since 1990) The business of manufacturing = A $1.6 trillion business – Every dollar of output in manufacturing drives $3.25 of total economic activity

Jobs Depend on Manufacturing

Manufacturers’ New Orders & Sales

Canada’s Merchandise Trade

Manufacturing Sales (August 2009 – August 2010)

Manufacturing Sales by Sector (August 2009 – August 2010)

Manufacturing Sales by Sector (August 2009 – August 2010)

Business as Usual is not an Option Leadership – New strategies & effective implementation – Become an integral part of customer/supplier success – Focus on solutions, not products New market development – Finding new customers in new supply chains Innovation – New & improved solutions, products, services, production and business processes Logistics & Supply Chain solutions – Agile, just-when-needed solutions Cash Flow – Cash management & financing LEAN cost reduction – Focus on what customers value & eliminate waste in business & production processes Achieving results through people – skills and workforce capabilities

Innovation Strategies for Manufacturing Innovation is a business strategy – and ultimately an investment decision Drivers of Change – Challenges = Global competition & commoditization, structural changes – Opportunities = New markets, customers, structural changes Objective = Differentiate products as customer solutions What Manufacturers Need To Do – Identify problems to solve for customers – Develop & design specialized solutions for customers – New and improved products, services, technologies, services – Work with partners = researchers, suppliers, customers, integrators, services Resources = Productive Assets – Knowledge (R&D, Intellectual Property, Knowledge from Extended Networks) – People (Competencies, Techniques, Leadership & Work Practices) – Technology (Materials, Machinery, Equipment, Software) – Money

Cash Flow Drives Investment in Research & Development

Cash Flow Drives Investment in New Machinery & Equipment

Technology Investment as a Share of Cash Flow

Policy Options Impact of Policy Measure on Cash Flow Examples of Policy Measures Impacts of 1% Change in Cash Flow on Innovation Investments resulting from Policy Measures Increase in Before-Tax Profits - Harmonization of provincial sales taxes with the GST - Elimination of duties on imported technologies, goods, and services - Reduction in regulatory compliance costs - Subsidies tied to business investment % Reduction of Effective Tax Rate on Profits - Reduction in corporate income tax rate - Elimination of capital taxes % Increase in Capital Cost Allowance - Accelerated depreciation rates+ 0.64% Refundable investment Tax Credit - Scientific Research & Development Tax Credit - Refundable Investment Tax Credit %

Public Policy Priorities A manufacturing strategy to boost productivity & growth Encourage productive investments – Follow though on commitments to lower corporate income tax rates – Make 2-year write-off for M&E investments permanent – Make SR&ED refundable and improve eligibility requirements – Introduce a training tax credit creditable against EI premiums – Introduce a tax credit for regulatory compliance Help businesses find new customers and identify new opportunities to participate in technology development initiatives around the world Support the development, commercialization, and adoption of new and improved products and processes Strengthen technology transfer to business Maintain an innovative workforce – math, science, engineering, technical and workplace competencies, transitional training Improve the availability of financing for innovation and business growth Improve the business infrastructure – logistics, Lean regulation

Regional Strategic Priorities Community Leadership – Business, labour, government, innovation & logistics support infrastructure An economic development plan built on current strengths and taking advantage of opportunities over the next three to five years Prioritize – Focus on what can be done at a regional level to make a difference regionally, provincially, nationally Don’t try to pick winners – Focus on improving the business environment and assisting businesses and citizens in taking advantage of new opportunities Develop a clear understanding of business needs Support local entrepreneurship – New and established industries Communicate – Community objectives, capabilities, assets, and support services Collaborate – Businesses, labour, governments, education, innovation & logistics support infrastructure – to attract and retain investment Build connections – New procurement, technology opportunities, best practices, partnerships – regional, provincial, national, global Establish benchmarks and measure progress