Andrew Wahl
From the September 29, 2008 issue of Canadian Business magazine

Like many parts of southwestern Ontario, the four mid-sized cities of the Waterloo and Wellington regions have endured a series of shock waves. There’s the rising Canadian dollar, emboldened Chinese competition, a limping U.S. economy and the lurching North American automotive sector. The results have been predictable. The manufacturing industries in Kitchener, Waterloo, Cambridge and Guelph have shed thousands of jobs over the past several years, in everything from auto parts to snowblowers, and bank machines to furniture.

But the Waterloo-Guelph area — some 470,000 people within an hour’s drive west of Toronto — is resilient. Economists from the Bank of Montreal and the Conference Board of Canada earlier this year forecasted the region would bounce back, respectively predicting 2.7% and 3.3% average annual rates of real GDP growth between 2009 and 2012, among the highest in the country. “The area has demonstrated its ability to absorb these shocks in the past by moving up the value chain,” noted BMO’s report.

Indeed, the region is as good a model as any of an Ontario economy successfully shifting gears from traditional manufacturing to more advanced high-tech and knowledge-based industries. Anchored by three universities and the top-ranked Conestoga community college, all of which operate with close ties to local businesses, the region is also home to financial service companies Clarica Life Insurance and Manulife Financial, and a thriving entrepreneurial tech cluster led by Research In Motion (TSX: RIM), maker of the iconic BlackBerry mobile device. “The core strengths here remain the highly collaborative community, a good quality of life, our technology infrastructure, and exceptional universities with a co-operative framing to education at their core,” says RIM co-CEO Jim Balsillie. “What’s become additionally exciting is the ability to make it a critical centre of excellence for new forms of intellectual capital.”

Balsillie, along with his executive counterpart, RIM founder Mike Lazaridis, have donated hundreds of millions of dollars from their personal fortunes to establish new academic institutions and policy think-tanks, including the Centre for International Governance Innovation (CIGI). “Intellectual leadership dovetails really nicely with the commercial leadership of RIM,” Balsillie says. “There’s a real yin and yang going on there. As the Chinese would say, one and one is one. It’s all very holistic, complementary and powerful.”

Although RIM is the standard-bearer for the region’s successes and aspirations in the knowledge economy, manufacturing still employs more than a fifth of the 254,000-strong labour pool, according to forecasts by the Conference Board of Canada. And that sector is on the decline: the number of manufacturing jobs fell 5.4% in 2007 and is expected to fall a further 7.2% this year. That sounds grim, but even as some manufacturers buckle under — most recently, Linamar Corp. (TSX: LNR) announced a downsizing in late August, a move that will preponderantly impact its 22 locations in Guelph — others are building. German automotive controls producer Thomas Magnete selected Cambridge for a new North American plant to supply Chrysler’s new fuel-efficient V6 transmission, and Toyota Motor Manufacturing Canada, which already operates a 4,500-person factory in Cambridge, recently opened a reported $4-million training facility there, as well as another 1,200-employee site 45 kilometres away in Woodstock.

And, outside of the spotlight, there is a diverse group of small manufacturers that form the foundation of the economy. “Despite cyclical ups and downs, manufacturing employment in the area has changed little in the past 20 years,” BMO reported. “Yet the area put in a solid overall economic performance over that period. The recent story of plant closings is really one that has been going on for decades, as old factories close and new ones start up.”

Indeed, the greater Waterloo area is a hotbed of entrepreneurial activity. According to Communitech, the region’s high-tech professional association, the area now has 525 technology and advanced manufacturing companies, accounting for more than $13 billion in revenue, up from 325 companies and $6 billion in 2003. Of course, nearly half of that revenue is from RIM, but in the most recent 14 months, 139 early-stage companies have received $300 million in funding.

The key source of that innovation is the University of Waterloo, a global leader in computer science and engineering fields that encourages entrepreneurialism in its students (which Lazaridis was until he founded RIM), and has an open policy for professors to commercialize intellectual property without licensing it from the university. UW also offers a thriving co-op work placement program, which amply stocks a talent pool for local firms, including prominent homegrown tech companies Open Text (TSX: OTC) and Sandvine (TSX: SVC), as well as giants such as Microsoft (Nasdaq: MSFT) and Google (Nasdaq: GOOG), the latter of which is expanding its engineering team in a new office at the University of Waterloo Research and Technology Park.

UW is complemented by Wilfrid Laurier University’s business and economics faculty, and the new Balsillie School of International Affairs — a co-operative effort between the two universities and CIGI — may also lead to a new law school. Conestoga College, which recently received $21 million in funding for a new campus, works closely with local manufacturers such as Toyota to develop training programs. And John Boyd, preident of corporate relocation consultant Boyd Co. Inc., based in Princeton, N.J., says that several of his clients in bioinformatics and pharma-related services in the region have recruited grads from the University of Guelph’s bioscience programs.

The necessity of competing for businesses and talent with nearby Toronto and the northeastern U.S. has united the region. Despite the potential for fractious local politics between four closely situated municipalities and two regional levels of government, a spirit of co-operation persists. For example, Canada’s Technology Triangle Inc. (CTT) is a public-private partnership formed by the Waterloo Region and the Kitchener, Waterloo and Cambridge city governments to jointly promote the area, and it, in turn, has a good working relationship with local planning departments to make sure opportunities don’t get bogged down in red tape or political infighting. “If one community happens to land a prospect, that’s all to the good, because it will benefit the region as a whole,” says John Doherty, chairman of CTT, and the local managing partner of law firm Gowling Lafleur Henderson LLP. “It is not seen at all as a zero-sum game, where somebody’s gain is somebody else’s loss.”

Similarly, the technology industry is linked by Communitech, which taps into the experiential wisdom of successful executives, including Balsillie. “T
here’s a sense in this community that if you need assistance, you know where to go, and who to go to, whether it be inside or outside of government,” says Art Sinclair, director of economic development of the Kitchener Waterloo Chamber of Commerce, and a member of the Prosperity Council of Waterloo Region, an umbrella organization of CTT, Communitech, and municipal economic development organizations. “We are a very close community, and we all know each other. We’re still small enough.”

In many ways, RIM has outgrown little Waterloo, and it has had to establish satellite offices in Mississauga, Ottawa and Texas to recruit talent. While it maintains manufacturing facilities in Waterloo, RIM also employs contract manufacturing in eastern Europe and Latin America. “Waterloo is a vibrant and growing community, with a lot of pluses,” Balsillie says, “but there is only so much capacity for Waterloo and the region to absorb. There are a lot of open job positions. Still, an overwhelming majority of our employees are here. And we like it that way. It’s home.”