Canada Unveils National Aerospace Industry Strategy

The Canadian government has released the National Aerospace and Defence Strategic Framework, a 20-year vision aimed at helping Canada’s leaders in the aerospace, defence and space sectors identify where and how they can be globally competitive. The document is the result of the Canadian Aerospace Partnership (CAP) process that began in April 2005 among industry, regional & national government, academia, and labour.

The report addresses both global aerospace industry trends, and matters specific to Canada’s situation. Some quick findings, key thrusts, and defense contracts on the way include:

Canadian Basics

• The Canadian aerospace industry generated revenues of $21.7 billion in 2004, of which 84% came from exports. Defence is a $4.5 billion sub-sector, while Space is $2.4 billion.

• Space has seen rapid growth, with annual revenues increasing by more than 67% from 2000-2004 ($1.4 billion to $2.4 billion). Satellite communications remains the largest revenue generator at $1.8 billion of total revenues. Other key segments include satellite navigation and space science. Exports of $1.2 billion in 2004 (50%) are the highest proportion of any space-faring nation.

• Key indicators such as exports, trade balance, value-added and employment for the defence sector are trending upward – but Canada’s defense-related R&D is just $225 million.

• Upcoming “major” Canadian defense contracts include Hercules tactical airlift replacement, Medium/Heavy Lift Helicopter, Mobile Gun System, Joint Support Ship, Military Satellite Communications and Fixed Wing Search and Rescue project.

• Budget 2005 also included some major space initiatives, including initial funding for the SAR Constellation program (approximately $400 million over 5 years). The Canadian Space Agency will also examine a future hyperspectral mission.

• The industry provides high-quality employment for upwards of 73,000 Canadians. As well, spin-offs from the aerospace and defense industry have a significant impact on other sectors, such as medical devices, earth observation, agriculture and transformative technologies.

• Top 30 firms represent 95% of production. Bombardier alone represents 45% of industry sales.

• Key Canadian players: Bombardier, CAE, CMC Electronics, Heroux Devtek, Magellan Aerospace, SNC and MacDonald Dettwiler & Associates.

• Key international Canadian subsidiaries: Pratt & Whitney Canada, Bell Helicopter Textron, Boeing, Honeywell, Goodrich, Messier-Dowty, Rolls-Royce and General Dynamics.

• The Canadian industry invested more than $1.2 billion on research and development (R&D) in 2004, ranking as one of the top manufacturing sectors in terms of R&D intensity, export intensity and value-added per employee. But industry investment in R&D (as opposed to straight product development) has not increased proportionately with sales growth.

• Future opportunities: unmanned vehicle systems (UVS); small (personal) jet aircraft; nanotechnologies; hyperspectral technologies; diagnostics, prognostics and health management (DPHM) systems; sensors; complex networked systems; data and information management; and, software-based diagnostic and information management systems.

Strengths for the industry were listed as follows:

• Ties to US industry via agreements, subsidiaries, geography. Over the past 10 years, more than 70% of Canada’s aerospace exports have gone to the US, and Canada is the only country with a US ITAR(International Traffic in Arms Regulations) waiver.
  
• Strong Technical Education
  
• Leading per employee productivity, measured against a global scale… (but productivity growth is not keeping up, and so this advantage is eroding)
  
• Solid R&D Supporting Infrastructure
  
• Supportive Government Policies
  
• High Regulatory Standards
  
• Canada has strong maintenance and repair organization capabilities, and the growing worldwide market for such services will present opportunities for Canadian firms

Weaknesses or threats were listed as follows:

• Small Domestic Market
  
• Maturing Product and Technology Base
  
• Lack of a critical mass of firms with systems integration capability
  
• Pressures on the Supplier Base
  
• New competitors in eastern Europe, Russia and Asia, with a good base of aerospace skills, access to modern technology and low-cost labour
  
• Dropping R&D : Sales ratio
  
• Growing and potential issues with access to foreign markets
  
• The aging workforce problems that AIA describes for the US sector apply in Canada as well. By 2016, only 40% of Canada’s current manufacturing workforce and fewer than 33% of current aircraft maintenance engineers will be on the job. This will hit especially hard among skilled tradespeople, an area in which replacements take longer than average to train. It has been estimated that even moderate future growth rates of up to 2% annually in manufacturing will require up to 62,000 new skilled Canadian workers by 2016.

Key Segments in Which the Industry Has Proven Leadership, according to the report:

| 20-90 seat regional aircraft | 47% |
| Small gas turbine engines | 4% |
| Commercial flight simulators | 80% |
| Visual simulation sector | 70% |
| Civil helicopters | 14% |
| Landing gear | 31% |
| New large aircraft landing gear | 60% |
| Transport aircraft environmental control systems | 60% |

Global Trends

• Global aerospace sales are expected to reach US$2 trillion over the next 20 years. The global industry is shifting, however. Canada’s mature product base puts it at a critical juncture where it needs to make substantial investments in R&D and new-generation technology, product and capability development to take advantage of these opportunities.

• OEMs are striving to reduce design-development cycle times in order to bring new products to market quicker and cheaper as they refocus on their core competencies in design, integration and assembly. Instead of producing major subsystems themselves or dealing with numerous subsystems component suppliers, they have shifted responsibility for these activities down the supply chain.

• Growth is expected over the next 20 years in the civil aircraft sector, and over the next decade in the MRO(Maintenance and Repair) sector.

Key challenges

• Given Canada’s relatively small domestic defense requirements and its open market policies, there is growing pressure on domestic firms to shift work to other jurisdictions in order to assure access to those markets.

• As the global OEMs push responsibility further down the supply chain, Canadian firms must take on more design, finance and risk responsibilities. When Canadian firms participate in foreign programs, they are often expected to cover their non-recurring costs.

• DID: Many other countries are also embarking on “national strategies,” which is likely to create challenges for growth in Canada as similar subsidies and protectionist measures are enacted elsewhere.

Goals and Pillars

Agreed-upon goal is a Canadian aerospace and defense industry that:

• Comprises a critical mass of top tier platform OEMs, each with a world-leading position in its respective market segment;
  
• Possesses robust design and systems integration capabilities throughout the supply chain and product life cycle;
  
• Serves a diversified, global customer base; outperforms the global industry in selected niche markets and sustains a “Top 5” global ranking overall;
  
• Achieves an above-average compound annual growth rate and delivers above-average returns on investment compared with other aerospace and defense nations; and
  
• Sustains a level of domestic value-added commensurate with that of its principal competitors.

The “7 Pillars” or levers for action include:

• Securing Strategic Aerospace and Defense Investments
  
• Technology Development and Commercialization
  
• Skills Development
  
• Trade Policy and Trade Development Initiatives
  
• Sales Financing
  
• International program participation and Higher offsets for domestic programs
  
• More diversion into aerospace from existing regional/industrial programs

Details on specific initiatives under these headings are given in the report. Some items worth noting include:

• Creating a favorable R&D environment through the Scientific Research and Experimental Development tax credit. The USA recently made adjustments in this area as well.

• Developing Technology Roadmaps for low-cost composites and aircraft design as well as MRO (maintenance and repair). Technology Insertion Roadmaps, a streamlined approach to Technology Roadmaps, have been created for aircraft cabin management systems integration and for diagnostics, prognostics and health management systems technologies.

• Assist in the funding and development of Technology Roadmaps and Technology Insertion Roadmaps generally, to guide future collaborative technology development activity, allowing greater dissemination of new technologies.

Canada certainly isn’t the only country looking at a variant of a “national aerospace strategy” lately. Can the Canadian aerospace industry achieve these goals? Is this strategy a winning hand – and even if it is, do the players have the position and management to execute? How serious is the Canadian government, really? Even if they are serious, can they be much help given the global competitive forces at work?