An Analysis of Cornwall and area's Industrial Supply Capability As it Relates to the Ottawa Technology Cluster
Ottawa's technology cluster includes approximately 1,000 companies and they employ approximately 60,000 people. They have combined sales of approximately $12 billion, most of which are to other countries. Because of their export orientation and the current weakness in the Canadian dollar, they are seeking as much Canadian content as possible in the products and services they purchase.
The best opportunities for Cornwall companies to act as suppliers to Ottawa companies are for those products and services that go into their cost of goods sold (COGS). In 1999, it is estimated that COGS purchases amounted to $2.4 billion for products and $1.5 billion for outside services. The companies spent an additional $2.5 billion on internally supplied services.
There are a few Cornwall firms supplying products such as printed circuit boards and services such as software consulting to this market, but such sales amount to less than $20 million per year at this time. There are untapped opportunities for suppliers of products like machined and fabricated parts and services like transportation, warehousing and brokerage. Based on interviews with 30 companies, it is estimated that Cornwall companies could be supplying approximately $73 million worth of products and services by 2005. The figure will likely be much higher because new firms will likely be created, not only to address the Ottawa market but others like it around the world.
It is recommended that the Cornwall Economic Development Corporation work with Cornwall companies in making a statement that the city is serious about participating in the new economy. It should also encourage the formation of a Cornwall Capital Network to assist in the creation of new firms. Doyletech will work with some of the firms to represent them in the Ottawa market.
This report is intended to identify opportunities for Cornwall-based industrial and service companies to supply products and services to the Ottawa high technology cluster. An analysis of the major purchases made by that cluster is contained in a Doyletech report entitled "A Needs Analysis of Ottawa-Carleton's High Technology Industry: A Guide to Selling Products and Services to One of North America's Fastest Growing High Technology Markets". That analysis is focused on the products and services purchased by Ottawa-based firms that go into their Cost of Goods Sold (COGS). While a typical high technology company purchases products and services for carrying out all of its activities (sales, marketing, R&D, administration, etc.), COGS purchases offer the best opportunities to outside suppliers. They are not only larger in terms of dollar value but they are of a more regular nature.
In the analysis referred to above, the Ottawa high technology companies were classified under seventeen sectors and their product and service purchases were classified under twenty-four "bins" (twelve for each). An example of a sector is Aerospace, Defence and Security Technology, an example of a product bin is semiconductors, and an example of a service bin is assembly. The analysis showed that in 1999, the Ottawa high technology industry purchased approximately $2.4 billion worth of products and $1.5 billion worth of services for use in the supply of their own products and services.
Scope of the Analysis
This report will analyze the potential of Cornwall-based companies to address those needs both by product and service bins. It will also make recommendations on how to address them more aggressively. It will not identify the potential by individual companies because most of those that were interviewed made it clear that they did not want sales figures to be identified in any written report. All of them were made aware of the general contents of the needs analysis report whose circulation is being controlled by the Cornwall Economic Development Corporation.
The results of the supply analysis are summarized in two tables, one showing product supply capability by sector and another showing service supply capability by sector. This information will be helpful to the Cornwall Economic Development Corporation in the building of linkages between Cornwall and Ottawa and to individual companies in assessing the magnitude of the opportunities available to them.
Cornwall's Supply Capability
Appendix I provides a listing of Cornwall companies that are likely to be in a position to act as suppliers to the Ottawa technology cluster. The companies that were interviewed are identified with an asterisk. The main objectives of the interviews were:
- To identify their existing products and services;
- To identify their current markets; and
- To assess their current and future capability to supply products and services to Ottawa-based high technology companies.
An estimate of what Cornwall companies could be selling into Ottawa on an annual basis five years from now if the existing companies were to pursue such business aggressively, is available. The estimates are based on the information gathered during the interviews. They do not assume the formation of new companies nor any dramatic shift in the corporate missions of the existing companies. This means that the future potential is likely understated because it is inevitable that new companies will be formed as the opportunities become more visible.
Some of the companies interviewed are already supplying products and services to Ottawa, but current annual sales figures were not listed because there are very few of them in a given product or service bin and it would have breached company confidentiality. In total, current sales to the Ottawa cluster are estimated to be less than $20 million for products and services combined which accounts for 150 direct jobs. The data indicate that this number could reach $73.5 million by 2005 - $23.5 million in products and $50.0 million in services.
Another key assumption behind the supply numbers is that the Ottawa market for such products and services will grow at 7 percent per year across the board. This is the average compound annual growth rate (CAGR) for the Ottawa technology cluster over the past thirty years. Obviously, some sectors (such as Electro-Optical) will grow at a faster rate than others (such as Electro-Mechanical) but the needs analysis study referred to earlier did not provide growth rates by sector.
The following are some of the other findings of the interviews:
- If a Cornwall company is already selling into the Ottawa cluster, it is either selling very little as a percentage of its total sales or a great deal. For many companies, sales to Ottawa high technology firms represented between 1 and 5% of their total 1999 sales. However, there were a few firms where such sales accounted for between 40 and 50% of their total sales volume. No company stated a moderate sales figure (which could reasonably be interpreted to be in the range of 20 to 30% of total sales). This implies that the $20 million total sales figure stated above is heavily dominated by the activity of a few companies. It also suggests that entire industrial and service sectors of the Cornwall economy are insignificant suppliers to the Ottawa technology cluster. Examples of sectors where there should be more penetration are customs brokerage and transportation.
- Many Cornwall companies do not currently view the Ottawa technology cluster as a sales priority. Surprising, three firms interviewed did not have a strong desire to grow their business beyond current levels. Maintaining and managing the existing client base was their main priority.
- Many Cornwall companies do not view the Ottawa technology cluster as a sales priority for the future. Only 50% of the companies interviewed expected the Ottawa market to become "more important" to their firm in the future.
- While many companies expressed a desire for help in penetrating the Ottawa marketplace, the majority of them stated that the Cornwall area and the United States are their priorities at this time. Two of the firms wanted to be shown whether there is a real business case for being in Ottawa.
- Operators in certain sectors are at an inherent disadvantage when trying to establish stronger linkages with the Ottawa technology cluster. For example, Cornwall-based printers cannot effectively compete in the Ottawa market because proximity is still a big issue in this industry. Press checks must be done on-site and can occur at any time of the day or night. Therefore, an Ottawa technology firm would have a propensity to deal with an Ottawa-area printer. Despite the proximity issue, our findings suggest that a high-end four-colour process printing capability is lacking in Cornwall.
- Operators in some sectors are relatively better able to compete externally. Software development can be done in just about any town, city, or village in Canada and sold nationally and internationally either over the web or through more conventional channels. It is therefore somewhat surprising that Cornwall does not have a stronger software supply capability.
- Ottawa technology firms which were identified by Cornwall-based firms as current clients include Chrysalis-ITS, Nortel Networks, Newbridge Networks, NAV Canada, JDS Uniphase, Rebel.com, Computing Devices Canada, GSI Lumonics, and Cognos Inc.
- There is a growing recognition in Cornwall that a technology economy requires bright people with bright ideas. If these are the sort of workers a region needs to thrive, there must be a strong educational infrastructure. Cornwall has three major educational institutions (St. Lawrence College, Lincien College and Academy of Learning), which is significant for a community of 47,000 residents.
Overall, the interaction between Cornwall companies and the Ottawa technology cluster is about what might be expected. The companies that are serving the old economy have very little awareness of the Ottawa opportunity. Those that are serving the new economy (e.g. printed circuit board manufacturers) have a better awareness but their penetration of the market is spotty. The information presented in the needs analysis report should assist both types of companies in achieving a better understanding of the Ottawa market.
The interviews also provided a number of other insights:
- Many Cornwall companies have not yet adopted the web as a means of doing business. A significant portion of the firms interviewed either had no web site or were just in the process of developing one. This is especially surprising given these firms are either medium or high technology enterprises. It is also surprising given the high penetration of the web by Ottawa firms. Two firms which did not have corporate web sites were concerned that such sites could provide too much information to their competition on their in-house capabilities. This view is in sharp contrast to that currently existing in the Ottawa technology cluster.
- A number of Cornwall companies mentioned that finding and retaining qualified employees is a significant challenge. Five of the thirty firms mentioned that attracting employees with the required skills set to Cornwall was a problem. Many of these potential employees (especially younger candidates) were seeking employment in larger urban areas such as Toronto, Ottawa, Montreal and even the United States.
- Three companies expressed concern over the relevancy of the schooling being provided to current university and college students. One company expressed concern over how software training is being conducted. It was indicated that instead of training in a number of software languages, truly in-depth knowledge of the most prominent languages is what is desired by the software sector. While one firm required hardware people with good software skills, another required software people with a sound foundation in hardware design. These comments would suggest a growing need for combined hardware and software skill sets for new graduates.
- Some companies discussed the competitive pressures they currently face in their markets. Two of them stated that the low quality of competitors' products means that they must justify their quality to clients. Both firms are seeking to avoid the lower end segments of their markets (ie. the price sensitive segments). Another firm voiced some concern over profit margins.
- Two companies expressed the need to raise venture capital to finance expansion.
Matching Cornwall's Supply Capability with the Needs of the Ottawa Technology Cluster
The majority of Cornwall's current supply capability is concentrated in the following product and service bins.
- Printed circuit boards (assembled)
- Software products
- Component assembly
- System Assembly
The two major printed circuit suppliers are United Tri-Tech Corporation and SigmaPoint Technologies Inc. Details on their sales figures are not given in this report because of the requirement for company confidentiality. They both seem to have a good understanding of the Ottawa market. However, the needs analysis report referred to earlier will assist them in understanding the breakdown of their market potential by sector. (The largest sectors for these bins are Aerospace, Defence and Security Technology, Electro-Optical Technology and Telecommunications, Satellite and Mobile Communications).
Although there are some companies supplying software products and services to Ottawa, this is probably the largest untapped market. It presents the most immediate opportunity for the creation of new firms. Investors and entrepreneurs who are contemplating the creation of such firms will also find the needs analysis report to be helpful. While such firms should not rely completely on the Ottawa cluster for their market, they will find that subcontracting to Ottawa companies will help them ramp up their business with minimum risk and investment capital. For an early stage company, a purchase order can be as valuable as risk capital.
As stated previously, the limited software supply capability in Cornwall is somewhat surprising. Existing software firms tend to target large industrial companies rather than small or medium size enterprises. For example, Cyborg Systems' human resource management system (HRMS) software is targeted for use in firms of 500 employees or more. There are only 16 firms that meet this criteria in the Ottawa technology cluster. Also, Busitech's manufacturing process control software is targeted at large manufacturing and process firms. It is clear that these software firms must be both national and international suppliers.
A sustainable technology cluster for Cornwall will require more software capability. It will require more software firms and more diversity in the types of software products being developed. In the Ottawa technology cluster, there were 5,035 employees working in software firms in January 2000 (9% of total cluster employment). The development of a diversified software sector is based on the rationale that this is an increasingly pervasive technology across all sectors. It is also based on the recognization that the start-up of software firms is much less capital intensive than for hardware firms.
A supply capability based partially on software is more sustainable than one based on other sectors (such as Aerospace and Defence). In the beginning, the Ottawa technology cluster was heavily based on the Defence, Aerospace and Security technology sector but it is now significantly more diversified.
According to Statistics Canada data, Cornwall's two largest sectors in terms of employment are services (41%) and manufacturing (21%). This accounts for a very significant 62% of the entire labour force. If Cornwall is to develop into a significant technology cluster the service and manufacturing sectors will have to become more focused on the high technology industry.
A key to Cornwall's strategy will be to encourage the start-up and growth of software firms providing both products and services to fast growing technology sectors such as the Electro-Optical and Telecommunications, Satellite and Mobile Communications sectors. According to the Canadian Institute for Photonic Innovations (CIPI), the current revolution in photonics is comparable to the invention of the automobile or the introduction of electricity. Cornwall companies that can create software for use by photonics professionals can capitalize on the growth in Ottawa's Electro-Optical sector. For Cornwall as a whole, it represents a realistic and efficient way of participating in these growth sectors. Currently, the only way in which Cornwall is really participating in the dramatic growth of the photonics market is by supplying printed circuit boards to firms such as JDS Uniphase and Nortel Networks.
As mentioned previously, Cornwall also has an existing supply capability in the area of electronics manufacturing services (EMS). This is encouraging given that there are many microelectronics firms in the Ottawa technology cluster. In fact, Industry Canada's publication "The Microelectronics Industry in Canada: A Capability Guide" identifies 78 prominent microelectronics firms in Canada and approximately 40% of them are either headquartered in Ottawa or have significant employment within the cluster. Not only do microelectronics firms represent excellent clients for EMS providers, there is currently a trend toward outsourcing in the Ottawa cluster. This is discussed in the needs analysis report.
Microelectronics firms in Ottawa which have recently experienced rapid growth include: Chrysalis-ITS, Cadence Design Systems Canada, Lucent Microelectronics, Cadabra Design Automation, Semiconductor Insights, Chipworks, Extreme Packet Devices, Catena Technologies Canada, Mitel Semiconductor, Philsar Semiconductor, and Tundra Semiconductor.
The largest EMS company in Canada is Toronto-based Celestica Inc.; in fact, it is the third largest such firm in the world. It employs over 10,000 people worldwide in 17 manufacturing and design facilities. Another large EMS company is Montreal-based C-MAC Industries which has operations in Kanata. Aimtronics Corp. is another significant EMS company with 6 facilities, including one in Kanata also.
As identified in the needs analysis report, the Ottawa technology cluster presents a significant sales opportunity for qualified suppliers in the area of packaging. Cabinets (non-metal) were identified as one of the product bins in the needs analysis study (1999 purchases amounted to approximately $130 million). Many high technology products are packaged in containers made of plastic and advanced materials. A major driving force in the demand for such enclosures is the proliferation of wireless devices and portable instrumentation. Moreover, the largest sector of the Ottawa technology cluster is the Telecommunications, Satellite and Mobile Communications sector consisting of a number of firms producing portable and wireless products. Cornwall has a number of plastics firms but most have been established to address more traditional industrial markets. Cornwall also has a few companies that specialize in custom packaging products that should be very interested in learning about the Ottawa opportunity (shipping enclosures represented $121 million in 1999 purchases).
There are opportunities for higher-end machine shops to penetrate the Ottawa technology cluster. There are firms based in Cornwall and Summerstown that have the capability to supply the Ottawa market (see Appendix I). The need for new manufacturing technologies is particularly evident in industries such as microelectronics, telecommunications and biomedical devices where miniaturization is required. Conventional mechanical machining can create pieces and assemblies with sizes larger than a few hundred microns. Micromachining is now finding application in a range of industries. On the horizon, laser micromachining should find wider acceptance.
Doyletech Corporation can help both established and new firms in penetrating the Ottawa market on a sales agency basis. It can also help entrepreneurs in the preparation of their business plans and in market research.
The following are actions that might be taken by the Cornwall Economic Development Corporation in establishing better linkages with the Ottawa technology cluster.
- Have Doyletech deliver a seminar to Cornwall companies explaining the contents of the needs analysis report referred to earlier and this report. Each attendee should receive at least a copy of the figures in that report. This could be an evening session.
- In cooperation with a number of Cornwall companies, prepare a small handbook entitled something like "Cornwall and the New Economy" which would list the firms that are capable of supplying products and services of the type referred to in the needs analysis report. It would not be focused on Ottawa but would serve as a handout for different occasions. The Ottawa Technology Industry Guide published by the Ottawa Economic Development Corporation and the Ottawa Business Journal is an example of such a publication, but the Cornwall publication need not be as elaborate. However, it should have significant narrative which emphasizes that the city is determined to participate in the new economy. Like the Ottawa publication, it should be updated at least twice a year.
- A Cornwall Capital Network should be formed to assist entrepreneurs in launching new companies.
- The mayor and / or company executives should take on speaking engagements in Ottawa to emphasize its focus on the new economy. The Technology Executives Breakfasts (TEB) that are held at the Corel Centre would be a suitable venue. These events are sponsored by the Ottawa-Carleton Research Institute (OCRI). Doyletech could assist in such arrangements. OCRI's Ottawa Valley Technology Showcase (March 29, 2000) should also be attended. This is a tradeshow of Ottawa high technology firms showcasing their products and services held throughout the Corel Centre. This event is well attended by employees and managers of area technology firms as well as by firms selling to these markets. The show is produced in part by Ottawa Business Journal Events (230-8699). The event also consists of the Ottawa-Carleton Research Institute's Annual General Meeting (AGM). Another event is .COMMERCE 2000 Business, Technology Solutions Expo (May 2-3, 2000). This is Ottawa's only annual business and I.T. event and the largest event of its kind in Ottawa. This show is also produced by Ottawa Business Journal Events (230-8699).
The data presented in this report and the needs analysis report are very approximate. As stated in the needs analysis report, it is difficult to identify and quantify sales opportunities with any degree of accuracy without releasing information that is confidential to individual companies. The same is true in assessing and documenting the supply capability. What the data in the needs analysis report does indicate is that the COGS purchases made by Ottawa-based companies represent significant (and growing) sales opportunities. It is not suggested that all of those purchases could be filled by companies based in Canada. Only a small percentage of them could ever be filled by Cornwall companies, but because the opportunity is so large, efforts should be made to quantify it so that it can be more easily related to Cornwall's supply capability.
In terms of employment, the existing sales of $20 million per year would be employing about 150 people, and the $73.5 million five years from now would be employing about 600 people. This figure could be much higher if new companies were formed and they addressed more of the product and service bins.
Cornwall's proximity to Ottawa will probably be its greatest economic advantage in the immediate future. The Ottawa technology cluster is more export oriented than those in Montreal and Toronto and Canadian content in its purchased products and services is very important. If it grows at its traditional 7% CAGR, its employment will exceed 500,000 within thirty years. While that number is difficult to imagine, it should be remembered that Silicon Valley in California now employs close to one million high technology workers. Thirty years ago, its employment was roughly equal to what OttawaÃ‚â€™s is today.
Geographically, its growth will be toward the west (Carleton Place and Arnprior) and toward the south (in a corridor from the airport to Highway 401). Even if no action is taken, Cornwall will begin to feel its impact within about twenty years because at least a part of it will be within commuting distance. The Electro-Optical sector is already expanding to the eastern part of Ottawa. However, proactive steps taken at this time should help Cornwall develop a mini-cluster of its own and this will skew the development in the direction of Cornwall.