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

2. Presentation Outline  Introduction:  Present Status of the Global Auto Industry;  Ontario’s Place Within the Industry  The Value Chain – Who Does What?  Major Technological and Commercial Trends  The Key Challenges We Face  The competition  A Solution for Consideration

3. Global & North American Automotive Sales & Production

5. ~105M in 2020

6. Global vehicle assembly capacity is about 30M units too high!!

11. The Value Chain – Who Does What?

13. 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);  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.

14. Technological Trends and R&D in the Automotive Industry Global and Canada

15. 32 Years of Automotive Progress 1981 Ford Escort 2013 Ford Focus Curb Weight1100 kg.1400 kg. 0-60 Time15.1 sec.8.3 sec. EPA Fuel Economy23 mpg31 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.

16. CAFE REGULATIONS – Complex but mandatory for future light duty vehicles of all types & sizes 100% change in 15 years!

17. Global & Canadian Auto Sector Innovation Metrics How does Canada’s auto sector compare globally in R&D and product development investment?

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

19. Auto Industry Statistics - Global 20112012 Global Light Vehicle & Parts Production 77.1 M81 M OEMSupplierOEMSupplier Revenue$ 1.9 T$ 392.1 B$ 2.0 T$ 374.9 B Profit$ 103.1 B$ 15.8 B$ 95.7 B$ 18.9 B Margin5.5%4.0%4.8%5% R&D & PD$ 96.8 B$ 100 B $ / vehicle$1257$1235 Source: 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.

20. Auto Industry Product Development Investments – Comparing Global & Canadian Data 20112012 Global Light Vehicle Production 77.1 M81 M Product Development Expenditures $ 96.8 B$ 100 B Product Development Investment $ / car $1257$1235 Canada Light Vehicle Production 2.12 M2.45 M Product Development Expenditures (est.) $ 425 M$ 500 M Product Development Investment $ / car $ 200$ 204 Data from Booz & Co. 2012 Global Innovation 1000, DesRosiers Automotive Consultants and Industry Canada 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).

21. Auto Industry R&D in Canada & Abroad  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:  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.

22. Canada’s Place in the Global Auto Sector

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

24. North American OEM HQ Locations  Chrysler LLC – Auburn Hills MI  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 8000 km Canada’s Auto Industry All of which are within this little red circle

27. The Competition

31. 2010 vehicle production was about 78 million units despite the slowdown in the US and Western Europe Source: Global Insight Canada 2.1 M U.S. 7.8 M S. America 4.4 M W. Europe 13.8 M E. Europe 6.0 M India 3.5 M China 18.3 M Korea 4.3 M Australia 249 K Malaysia 568 K S. Africa 449 K Thailand 1.6 M Mexico 2.4 M Japan 9.6 M Indonesia 721K

32. 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 Insight Canada 2.1 M U.S. 11.2 M S. America 5.9 M W. Europe 16.0 M E. Europe 7.8 M India 6.4 M China 25.9 M Korea 4.6 M Australia 350 K Malaysia 681 K S. Africa 748 K Thailand 2.5 M Mexico 3.4 M Japan 9.7 M Indonesia 1.3 M

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

34. Innovation in the Canadian Automotive Sector Where in the R&D and product development process does Canada fail to invest adequately?

35. Innovation in Canada’s Auto Industry Increased Investment Needed

36. Conclusions and Take-Away Messages  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;  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.

37. Capacity for Growing R&D in Canada’s Auto Industry (data from a recent survey of 25 Canadian auto parts firms by AUTO21) QuestionCumulative Response Canadian automotive R&D expenditures over the next 5 years$775.4 million R&D expenditures abroad over the next 5 years$3141.2 million Ratio 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 million Potential to grow overall R&D expenditures in Canada with assistance$197 million Anticipated growth/retention in R&D employment in Canada480 R&D jobs Estimated amount of direct investment program funding requests$196 million / 5 Years NOTE: No OEM data is included in the survey.

38. PROGRAM Industry support & commercialization plan and capacity PRIORITIESbuilding determine project selection; FUNDING50% industry & 50% program RECIPIENTFunds 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 company’s 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…..

39. Project Activities & Proposed Repayment Rules Supported R&D ActivityProgram Funds Repayable? Build a Prototype Component 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

40. Developing the best people and the best technology for the future of the automotive industry www.auto21.ca www.nce.gc.ca