Origin of Study and Research Questions

2. Origin of Study and Research Questions • Collaborative Industry Canada – Canadian Manufacturers & Exporters and McMaster University initiative to better understand evolving business strategies used by Canadian manufacturers to improve their competitiveness • Study is based on the manufacturing component of Survey Innovation and Business Strategy (SIBS) results (survey reached 4,400 manufacturers and 80% responded) • Insights drawn from interviews with Canadian Manufacturers & Exporters (CME), senior operations and supply chain executives of leading firms, and academia Research Questions: • Is the manufacturing sector a leader in innovation in Canada? • What are drivers behind the selection of production locations of manufacturers? • Is there spill over investment in other value-added business activities from investment in production facilities? • What is Canada’s comparative advantage in attracting manufacturing investment?

3. Emerging Trends in Advanced Manufacturing • Manufacturers are designing their operations to deliver a suite of capabilities for their customers and compete in fundamentally different markets against competitors from both low-cost countries and developed economies • New investment in manufacturing facilities in Canada is driven by the need to increase agility, expand mass customization capabilities, optimize prototyping and new product introductions (NPI), and capitalize market niches • To avoid supply chain interruptions and raise their level of responsiveness and dependability, manufacturers are considering multiple locations for critical operations • Organizational, process, marketing and product innovation are critical for Canadian manufacturers to compete and participate in global value chains • Successful advanced manufacturing strategies are linked to corporate leadership, innovative culture and highly skilled workforce at the operational, tactical and managerial level Source: The Boston Consulting Group and Wharton School of Business. Rethinking Operations for a Two-Speed World, 2011 McKinsey & Company. Reducing risk in your manufacturing footprint, 2009 The Economist. Moving back to America - The dwindling allure of building factories offshore, May 12, 2011

4. Manufacturers are utilizing a mix of strategies within a global production framework to estimate the trade-offs between opportunities Source: The Boston Consulting Group and Wharton School of Business. Rethinking Operations for a Two-Speed World, 2011 The Economist. Moving back to America - The dwindling allure of building factories offshore, May 12, 2011 State of Advanced Manufacturing industry and academic research committee, 2011

5. The majority of Canadian manufacturers face competition from multinational enterprises in their main market • Even 64% of small manufacturers are competing against multinational enterprises in their main market • In addition to reducing price (65% of firms), manufacturers responded to increased competition by adopting a new process (39%), changing marketing expenditure (39%) and introducing a new product or service (37%) Source: Industry Canada, Foreign Affairs and International Trade Canada and Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010

6. Canadian manufacturers are directly and indirectly integrating into the global market • The majority of motor vehicle parts, primary metal, and aerospace manufacturers produce intermediate goods that are incorporated into their Canadian customers’ exported products • Across many industries, manufacturers producing intermediate goods often position themselves near their large customers to create a localized supply chain (clusters) Source: Industry Canada, Foreign Affairs and International Trade Canada and Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010

7. Overall, more than 2x as many manufacturing firms increased production capabilities (25%) between 2007 and 2009 than reduced capabilities (11%) • Across most manufacturing industries, more firms increased production capabilities between 2007 and 2009 than reduced capabilities • Of the large* manufacturers that closed an existing production facility or reduced capacity, 29% also opened a new production facility or expanded production capacity in Canada • Overall, manufacturers were nearly four times more likely to increase production capabilities in Canada between 2007 and 2009 than abroad *Small (20-99 employees), medium (100-249 employees) and large (at least 250 employees) Source: Industry Canada, Foreign Affairs and International Trade Canada and Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010

8. Many large manufacturers expand other strategic activities when expanding their production capabilities in Canada • Production activity is an anchor for investments in other value-added business activities such as R&D, logistics, and provision of services. • Location decisions for these investments often rely on proximity of supply chain partners, availability of highly qualified personnel, regulatory frameworks and collaboration opportunities with universities. • Large* manufacturers with headquarters in Canada and those with headquarters abroad increased production capabilities in Canada at a comparable rate (34% and 28% respectively). Activities coinciding with an expansion of production capabilities (% of large firms introducing other activities, 2007-2009) *Small (20-99 employees), medium (100-249 employees) and large (at least 250 employees) Source: Industry Canada, Customized tabulation from the Survey of Innovation and Business Strategy 2009, 2010

9. Over 2x as many manufacturers increased R&D capabilities in Canada between 2007 and 2009 than reduced capabilities • Firms of all sizes are investing in new R&D facilities in Canada • Organic R&D capacity expansion is a trend in most Canadian manufacturing industries from 2007 to 2009 • Large manufacturers with head offices in Canada are more likely to invest in R&D facilities in Canada compared to manufacturers with foreign headquarters Source: Industry Canada, Foreign Affairs and International Trade Canada and Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010

10. An emerging business model consists of outsourcing the production function to focus on other value propositions activities such as R&D, logistics and commercialisation • Overall, the majority of outsourcing* of production and R&D is within Canada • Outsourcing of production is often focused on non-core product groupsin areas where contract manufacturers have specific capabilities • Large manufacturers are twice as likely to outsource some production abroad than small manufacturers (21% and 10% respectively) Source: Industry Canada, Foreign Affairs and International Trade Canada and Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010 *Outsourcing of production consists of the contract manufacturer fulfilling the fabrication of a good based on the hiring firm’s design specifications

11. The manufacturing sector outpaces all other industries in Canada* in the introduction of process, organizational, product and marketing innovation • 2/3 of manufacturers that introduced process innovations between 2007 and 2009 were able to reduce the average cost of their products (average cost reduction was 11%). • In general, large manufacturers (50%) are more likely to utilize advanced production technologies than medium (43%) or small manufacturers (34%). *All other industries includes: Agriculture, forestry, fishing and hunting; Mining, quarrying, and oil and gas extraction; Utilities; Construction; Wholesale Trade; Retail trade; Transportation and warehousing; Information and cultural industries ; Finance and insurance; Real estate and rental and leasing; Professional, scientific, and technical services; Management of companies and enterprises; and Administrative and support, waste management and remediation services (20+ employees). Source: Industry Canada, Customized tabulation from the Survey of Innovation and Business Strategy 2009, 2010

12. Implementing a mix of innovation (process, product, organizational and marketing) is a key focus across a number of manufacturing industries • Overall, the introduction of the four types of innovation by manufacturers is similar by size of firm • Also, many manufacturers are implementing organizational innovation by establishing collaborative strategic partnerships with both customers and suppliers Source: Industry Canada, Foreign Affairs and International Trade Canada and Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010

13. Many manufacturers are expanding their adoption of process innovations beyond new manufacturing methods to include other critical operations • Improved quality and supply chain agility are among the leading outcomes of process innovation that influence the marketing activities of manufacturers • Also, manufacturers that have adopted process innovation focused on green supply chain management have successfully improved their business and environmental performance on many levels Source: Industry Canada, Foreign Affairs and International Trade Canada and Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010 Industry Canada, Green Supply Chain Management: Manufacturing – A Canadian Perspective, 2009

14. North American Best-in-Class* (BiC) manufacturers distinguish themselves by their implementation of process innovations and advanced technologies • A key focus for BiC manufacturers is to optimize the order-to-delivery process and to synchronize production execution with customer demand. • The use of technology to enable the modeling of inventory targets to optimize production schedules is key for firms aiming to increase their production flexibility. Note: Best-in-Class are defined as the top 20% of North American manufacturers benchmarked to perfect order delivery and improvement in four performance metrics: manufacturing cycle time, customer lead times, inventory carrying costs, and inventory write off. Laggards represent the bottom 30% of firms benchmarked to the same metrics. Source: Aberdeen Group. Lean Manufacturing: Five Tips for Reducing Waste in the Supply Chain, 2009.

15. Key Findings • Manufacturing is a vibrant, highly innovative and technology driven industry of the Canadian economy • More than twice as many manufacturers increased production (25%) and R&D (7.9%) capabilities in Canada between 2007 and 2009 than reduced capabilities (11% and 2.1% respectively) • New investment in manufacturing facilities in Canada is driven by the need to increase agility, expand mass customization capabilities, capitalize market niches and optimize prototyping and new product introductions (NPI) • The manufacturing sector outpaces all other industries in the introduction of process, organizational, product and marketing innovations in Canada • Best-in-Class manufacturers distinguish themselves by their implementation of process innovations and advanced technologies • Production flexibility, logistics network quality and industrial engineering capabilities are key competitive advantages for Canadian manufacturing; all three rely heavily on process and organizational innovation