ONTARIO AUTO MAYORS & INDUSTRY STAKEHOLDERS SUMMIT. June 16, 2014

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2 ONTARIO AUTO MAYORS & INDUSTRY STAKEHOLDERS SUMMIT June 16, 2014

3 HEADLINES

4 IN CANADA, STRONG VEHICLE SALES ARE MASKING CONCERNS ABOUT FUTURE VEHICLE PRODUCTION Excerpt from Dennis DesRosiers Presentation to C.D Howe, May 13, 2014

5 VEHICLE PRODUCTION IN CANADA REMAINS A MAJOR CONCERN Canadian Vehicle production peaked at 3 million units in 1999 but has since been in gradual decline Vehicle production in 2013 was 2.4 million units NAFTA Light Vehicle Production (2009 to 2020) Production in Mexico, the Southern US & Michigan growing at the expense of Canada Rest of NA Mexico Southern US Michigan Canada Source: Joseph McCabe, Automotive Compass, APMA Conference, October 2 nd, 2013 Canada is not participating in the North American manufacturing renaissance

6 GOING FORWARD, CANADA S SHARE OF GLOBAL VEHICLE PRODUCTION IS FORECAST TO DECLINE EVEN FURTHER Forecast Growth in Vehicle Production from 2012 to 2019 Country 2012 Volume 2019 Volume Growth % China 18,298,986 30,142, % United States 10,121,034 11,691, % Japan 9,544,740 8,699, % Germany 5,586,276 5,862, % South Korea 4,478,899 4,525,000 1% India 3,846,068 6,450, % Brazil 3,190,204 4,747, % Mexico 2,874,460 4,146, % Canada 2,454,069 1,761, % Thailand 2,402,513 3,100, % Russia 2,078,368 2,700, % Spain 1,939,351 2,599,238 34% France 1,926,863 2,218, % United Kingdom 1,563,734 1,741, % Czech Republic 1,113,559 1,375, % Indonesia 1,030,431 1,800, % Turkey 1,008,266 1,327, % Slovakia 840, , % Argentina 756,880 1,091, % Italy 669, , % Source: Joseph McCabe, Automotive Compass, APMA Conference, October 2 nd, 2013

7 Charlotte Yates, McMaster Grieg Mordue, Toyota Ray Byers, Government Initiatives, Wayne County, Michigan John Holmes, Queens University Tod Rutherford, University of Syracuse PANEL PRESENTATION

8 OEMs Parts Makers Labour A Collaborative Effort

9 High level data suggests relative stability But The data masks a single, over-riding, problem However, Canada does offer many positive attributes But Several challenges exist which cause investors concern Therefore, CAPC offers recommendations for Public Sector Private Sector The Narrative

10 High level data suggests relative stability But The data masks a single, over-riding, problem However, Canada does offer many positive attributes But Several challenges exist which cause investors concern Therefore, CAPC offers recommendations for Public Sector Private Sector The Narrative

11 Millions 25 Vehicle Sales - North America U.S. Mexico Canada Vehicle Sales

12 Production Percent Millions 14 North America: Production - Volume Canada Mexico U.S % North America: Production - Percentage 70% 60% 50% 40% 30% 20% Canada Mexico U.S. 10% 0%

13 180,000 Employment 160, , , ,000 80,000 MV Parts Manufacturing MV Body & Trailer Mfg MV Manufacturing 60,000 40,000 20, Employment

14 1. Auto sector is #1 manufactured good 2. One assembly job = 9 additional jobs 3. Auto manufacturing = 9.6% of manufacturing GDP, 7.7% of mfg employment 4. Unique ability to generate value-added 5. Canada s #1 Manufactured export and #2 export overall 6. Auto manufacturing drives Canadian productivity growth Why Auto Matters

15 High level data suggests relative stability But The data masks a single, overriding, problem However, Canada does offer many positive attributes But Several challenges exist which cause investors concern Therefore, CAPC offers recommendations for Public Sector Private Sector The Narrative

16 Capital Spending The most pressing and urgent challenge facing the Canadian auto industry!

17 During the period 2011 to 2015, 3.5 million units of assembly capacity that will be added by auto manufacturers in NA. Canada gets < 3% Morgan Stanley Motor Vehicle Mfg Motor Vehicle Parts Mfg Motor Vehicle Body & Trailer Mfg U.S. - 63% Mexico - 34% Canada will add 110,000 units of capacity, just 3% of the total. Capital Spending

18 Current strong sales & elevated production Mask underlying challenges Historically, Canada was the low- cost, reliable, non-u.s. default for N.A. investment. Canada is not getting its fair-share of investment spending Mexico now occupies the default position Short term no problem Long term not sustainable Capital Spending

19 High level data suggests relative stability But The data masks a single, over-riding, problem However, Canada does offer many positive attributes But Several challenges exist which cause investors concern Therefore, CAPC offers recommendations for Public Sector Private Sector The Narrative

20 Positive Attributes Five of the world s leading global automotive OEMs have production facilities in Ontario Many of the largest and most successful original equipment suppliers have facilities in Canada

21 Corporate Taxes Combined Canada/Ontario rate (26% ) is lower than Mexico by 4%, and the U.S. by 14% Accelerated capital cost allowances (fifty percent straight line depreciation) for investments in machinery and equipment Quality of Life The Economist Intelligence Unit Quality of Life Index ranks Canada #1 in NA and #9 in the world. The United Nations Sustainable Development Solutions Network, ranks Canada #1 in NA and #6 in the world. Workforce Global Competitiveness Report for gives Canada outstanding rankings for its investments in education Canadian system of standardized qualifications ensures that individual tradespeople possess uniform, defined sets of skills Canada: Positive Attributes

22 Quality Since 1990, Canadian assembly plants have earned 1/3 of all JD Power Plant Quality Awards, 2/3 of JD Power Gold Automotive Ecosystem Leading global Tier 1 suppliers headquartered in Ontario World-class transportation infrastructure and proximity to U.S. markets Tariffs & Trade All tariffs on manufactured inputs and machinery and equipment to be reduced to zero by 2015 Smart, strategic trade policy has long been a feature in the development and growth of the industry in Canada Canada: Positive Attributes

23 High level data suggests relative stability But The data masks a single, over-riding, problem However, Canada does offer many positive attributes But Several challenges exist which cause investors concern Therefore, CAPC offers recommendations for Public Sector Private Sector The Narrative

24 The Goal To generate levels of profitability that will allow key players to leverage the benefits of the Canadian system.

25 Regulatory Burden Regulations that are not aligned with other auto manufacturing jurisdictions in North America, or which cannot be justified against the costs and associated benefits Utilities Electricity costs for a typical large scale assembly operation in the U.S. South or Mid-west are estimated to be as much as $5 million lower than those in Ontario Transportation Unpredictable operation of railway service Canada: Challenges

26 Exchange Rate Labour Cost 1.2 $50.00 $46.54 $45.00 $ $40.00 $35.00 New Hire Training Lump-sum Attrition Cost 0.6 $30.00 Emp. Insurance EHT / Medicare $25.00 $20.00 $15.00 Shift Premium WSIB / Worker Comp Vacation CPP / Social Security $10.00 $5.00 Canada: Challenges $0.00

27 The Competition: Not uncommon for cash and non-cash packages to be 60+ percent of capital investment in other countries Incentives AIF: Its complex nature involving refundable contributions and challenging tax treatments -- lessens its potential impact to investors Timeliness: Must provide assurance of government partnership as early in the planning process as possible Form: Cash is best easy to understand, easy to sell, easy to accept Canada: Challenges

28 The profile of the Canadian auto industry has shifted: low cost option in NA to higher cost globally Dollar appreciates from 60 cents to near parity Production from 2.9 Mil to 2.5 Mil Employment from 160,000 to 115,000 Capital spending drops Major long-term consequences Summary

29 High level data suggests relative stability But The data masks a single, over-riding, problem However, Canada does offer many positive attributes But Several challenges exist which cause investors concern Therefore, CAPC offers recommendations for Public Sector Private Sector The Narrative

30 1. Compete for assembly mandates with globally competitive investment supports 2. Reduce the fully-loaded cost of labour 3. Provide one-stop support for investment attraction 4. Improve transportation infrastructure and border policy 5. Ease regulatory burden 6. Pursue a free and balanced trade agenda 7. Align the number of working days with competitors jurisdictions Recommendations for the Public Sector

31 High level data suggests relative stability But The data masks a single, over-riding, problem However, Canada does offer many positive attributes But Several challenges exist which cause investors concern Therefore, CAPC offers recommendations for Public Sector Private Sector The Narrative

32 1. Invest in plants, machinery, and equipment. 2. Invest in people. 3. Invest in research and innovation 4. Develop a clear and compelling narrative for Canadian Investment Recommendations for the Private Sector

33 "To be the location of choice for automotive manufacturing within North America, driven by globally competitive innovation in a profitable and growing newvehicle market."

34 Canadian Automotive Components Industry: An Overview Tod D. Rutherford Department of Geography, The Maxwell School of Citizenship and Public Affairs, Syracuse University, Syracuse, New York John Holmes, Department of Geography, Queen s University, Kingston, Ontario Ontario Auto Mayor s Roundtable, Ford Oakville June

35 Sector overview Approximately 400 firms and establishments Employment (2013) 65,000 Highly diverse large Tier One MNCs (some Canadianbased), smaller suppliers, tool, die and molds (TDM) (mostly Canadian) Highly integrated into regional Great Lakes States automotive production

36 SELECTED AUTOMOTIVE PARTS FIRMS IN CANADA CANADIAN OWNED Magna International Linamar Martinrea Woodbridge Matcor-Matsu Wescast Van-Rob ABC Group Mitchell Plastics NARMCO Husky Injection Molding Valiant Windsor Mold FOREIGN OWNED Arvin Sango Aisin Seiki Autoliv Benteler Automotive Brose Dana DENSO JCI Lear Nemak Toyoda Gosei TRW Automotive Etc.

37 Automotive parts plant locations

38 US and Canadian-owned auto parts plants

39 Japanese owned auto parts plants

40 Sector Overview: (i) current restructuring (ii) the location of assembly plants (iii) trade composition and performance Prospects for Upgrading? Current Challenges (i) innovation (ii) skill development

41 (i) Current restructuring After 2001 significant decline in both number of establishments and employment Decline in exports and investment Erosion of key TDM sector

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43 Millions 2010$constant Automotive Parts Canada Manufacturing Shipments Exports

44 Employment Automotive Employment: Canada Assembly Parts

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46 Employment Index (1990=100) Employment, Automotive Parts, US vs. Canada: (1990=100) US Index Canada Index

47 Index (1990=100) Employment Trends, Automotive Parts, Ontario vs. United States: US Index Ontario Index Michigan/Ohio/Indiana Index

48 (ii) The key role of location of assembly plants i.e. every direct job in assembly creates approximately 3.4 upstream jobs in supply Southern Ontario has lost a lot of assembly capacity since 2000 Role of incentives and footprint agreements

49 (iii) Canadian automotive parts trade. Canadian parts especially concentrated in lower value added segments of automotive value chain Canada now has a trade deficit of $15 billion which equals 23,000 jobs in assembly and parts Canada is heavily reliant on imported auto parts.

50 Ontario Automotive Parts Exports Other 26% Mexico 2% US Mid South 8% US South 5% Great Lakes 59% Mexico 3% US Mid South 9% US South 8% Other 13% Great Lakes 67%

51 Ontario Automotive Parts Exports to Great Lakes States: 2013 ILLINOIS 7% WISCONSIN 1% INDIANA 19% MICHIGAN 54% OHIO 19% As % of All Automotive Parts Exports to Great Lakes Region

52 Prospects for Upgrading? Challenges confronting parts industry Can (will) Canada/Southern Ontario attract new assembly capacity? Shift focus more to parts and tool-making firms (DesRosiers, 2013)? Key role of innovation and skill development

53 (i) Innovation OEMs are increasingly expecting top suppliers to develop new products Most Canadian suppliers rely on incremental innovation Low levels of R+D performance Need to significantly boost Canadian parts R+D Technology transfer support especially to SMEs Automotive Innovation Fund?

54 (ii) Skill Development production workers increasingly need the thinking and communication skills formerly associated with at least some post-secondary education. For hourly workers, technologies, processes and jobs will continually evolve; workers will need to keep learning and adapt their skills to meet these new challenges. Educators at all levels must deliver lifelong learners: problem solvers who are able to communicate effectively (Driving Change, 2011b, 8-9). Secondary and community colleges generally better standard than the US But relatively limited formal workplace training in parts. Skill shortages? Tool and die/ robotic technicians Sectoral training initiatives recommended (see CAHR, 2008) But past initiatives (e.g. APSTC, 1990s) not successful

55 Summary Upgrading parts sector will require major increases in government investment and shifts in firm/sectorial strategies Challenge of relatively small size, low R+D, value added Need to develop strategies at the cross border regional scale?

56 Dorothy St. George, Town of Oakville Charlotte Yates, McMaster s Automotive Policy Project Ken Delany, McMaster s Automotive Policy Project RECOMMENDATIONS FOR ACTION

57 Recommendations from Economic Development Workshop Focus on actions within the power of municipalities Achieve power through collaboration and coordination Balance quick, easy wins and medium term actions

58 1. Coordinated Corporate Calling Harness power of current activities to drive common automotive objectives Learn about local challenges and opportunities Focus on coordination of strategy and messaging

59 2. Coordinated Outreach Raise awareness of the importance of the automotive industry to Ontario s economy Auto Mayors Day at Queen s Park Visits to OEM head offices in North America

60 3. Virtual Centre of Excellence Drive Auto Mayors objectives on a more permanent basis Leverage resources of other stakeholder groups Focus is on coordination of common goals for all Ontario automotive jurisdictions Determine issues on which Auto Mayors will lead

61 APRC at McMaster Recommendations for Ontario Automotive Mayors June 16, 2014

62 Public Private Partnerships Collaboration among industry, educational institutions and sub-national governments Link corporate R&D and university research with government and private investment Support SMEs in automotive and related sectors Examples Conestoga College Center for Smart Manufacturing Communitech in Waterloo

63 Convening Stakeholders All three levels of Gov t, Industry, Academia, Labour Automotive policy supports currently fragmented across Canadian regions and levels of government Across jurisdictions within Great Lakes region Production is integrated across jurisdictions within region Is there an opportunity for collaboration on building the entire region?

64 Build Institutional Capacity Municipalities can build expertise in: Labour market information to help sell the region s workforce Skills required by Industry Supply chain requirements of Industry Mapping of local and regional suppliers and customers Deepen relationships with decision makers Enhance industry knowledge Enhance ability to shape decisions

65 Build Knowledge of Tech Trends GHG emissions standards, fuel efficiency and related trends Electrification & light-leighting Alternative propulsion technologies Connected Car Safety & insurance related Car as platform to deliver information and entertainment Gov t Support for New Tech Quebec s support for electrification Municipal fleets can use new technology

66 Develop & Promote Auto Strategy Consult with Industry Sector Roundtable Develop Policy/Program Agenda Improve infrastructure & transportation (i.e. Bridge to U.S.) Programs to fund R&D and commercialization Incentives for large capital investment Programs to support new technology and facilitate electrification, light-weighting etc. Skills and training practices and policies Unified voice on policy is harder to ignore

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