Canada's aerospace industry traditionally punches above its weight. But will the new government continue Ottawa's tradition of supporting R&D?
Canada's industry is waiting anxiously to hear whether the new Ottawa government will continue the policy of supporting research and development that has helped make the country one of the leaders in aerospace. Changes are expected, but innovation is important to Canadians, and its aerospace industry has a strong focus on R&D.
Final figures are just coming in, but aerospace sales for last year are expected to be up modestly from 2005's total of C$21.8 billion ($18.8 billion), according to the Aerospace Industries Association of Canada (AIAC). This continues the industry's gradual recovery from its post-9/11 slump, but is still short of the sales peak of C$23.2 billion reached in 2001.
"On the whole it was a good year," says Peter Boag, AIAC president and chief executive. "There was a modest increase in sales and some sectors were very strong, including Pratt & Whitney Canada, CAE and Bell," he says. "Bombardier still has challenges on the regional jet side, but is strong in turboprops and business jets."
AIAC believes the industry's performance is good enough to maintain Canada's fourth place in the world aerospace sales rankings behind the USA, France and the UK. "On the whole there is strong demand and good growth," says Boag. "Those in the supply chain to Airbus and Boeing are doing well and there is a resurgence in defence markets, both domestic and US programmes, like the Joint Strike Fighter."
Employment is still well below its 2001 peak, although growing steadily, but by 2005 industry investment in capital and R&D had rebounded to its 2001 level of C$1.4 billion. One positive factor is that the Quebec industry, which accounts for more than 50% of the aerospace workforce, 60% of sales and 70% of R&D expenditure, has become more diversified in recent years, and less exposed to Bombardier's fortunes.
"The Montreal cluster's dynamism and diversity is much greater than it was. Bombardier's performance has improved and its relationship with other firms in the Montreal cluster is not as important," says Boag. "There are diverse and strong OEMs there that are not in the same business - Bell, CAE and P&WC - and it is now a strong cluster with diverse customers."
Aiming high
As the world's eighth-largest economy, Canada "punches above its weight" when it comes to aerospace, says AIAC. One reason is the country's appetite for innovation - Canada leads the G7 nations in public-sector R&D investment and its aerospace industry is peppered with small but innovative companies.
The largest federal government programme supporting business R&D in Canada is the scientific research and experimental development tax credit, which when combined with provincial tax measures can reduce the real cost of R&D expenditures by up to 60%. The governments also directly fund business R&D, which is particularly important for the aerospace industry as it competes globally.
"R&D tax credits, federal and provincial, are a useful mechanism, but do not eliminate the need for more-direct support," says Boag. The Technology Partnerships Canada (TPC) support programme closed in December after investing more than C$2 billion in aerospace R&D, and industry is waiting to find out what will be launched in its place by a new Conservative government that was critical of the support programme while in opposition.
Canadian government R&D support has its origins in the post-war years. "Industry had to find a way to get support to compete with companies in countries with a large military base for R&D," says CAE president and chief executive Bob Brown. "Canada's approach was to help industry develop R&D capabilities to compete for military contracts, and to develop civil products."
The mechanism was the Defence Industry Productivity Programme, which was criticised for not providing value for money and cancelled in 1995. Its successor, TPC, supported wider industry R&D by providing loans repayable from royalties, to a maximum 33% of a project's costs, with two-thirds of its budget going to aerospace and defence.
Renewed once, TPC's mandate expired in December with a flurry of aerospace deals including C$350 million to P&WC for technology development C$27.8 million to Messier-Dowty to develop advanced landing gear and smaller amounts for Goodrich to improve actuators, for ASCO to create a centre of excellence for high-lift devices, to MMIST to develop resupply unmanned air vehicles and to MDA to look at merging surveillance data from satellites and UAVs.
TPC "died a natural death" at the end of December, says Boag, and no successor has been announced. "We acutely need to do something for aerospace and defence. We do not have huge defence R&D and procurement budgets. We do not have NASA or the [European Union's] Framework Programme. A risk-sharing investment programme like TPC needs to continue."
Government talks
Industry has been in dialogue with the new government over a successor programme, but does not know what shape it will take. "It really needs to address the three priorities they have: transparency, accountability and value for money. We will see changes, but how significant remains to be seen," says Boag.
The answer could determine whether companies continue to invest in Canada. "We are using TPC funds now, under a 12-year deal signed two years ago to support development of a new generation of light helicopters," says Michel LeGaulle, director, business development, for Bell Helicopter Textron Canada. "In two to three years we will want to start a new product outside the negotiated package."
If Bell is to develop its next product, probably a new medium twin, in Canada, "there needs to be something beyond TPC", says LeGaulle, but he stresses the decision is about more than government support. "It's more than money. There has to be capacity, engineers, a certification authority and suppliers - the Montreal area has all that."
There was a time Canada's weak dollar would have been enough to attract work, but the currency's rapid appreciation against the US dollar - a 40% increase in value in just 40 months - has been a significant challenge for the industry. "It is not the relative change, it's the speed of change," says Boag. "We export 85% of our output, and our sales are in US dollars but our costs in Canadian dollars, so there was huge hit in a short period."
One result is a move to outsource work to lower-cost countries. Bombardier has shifted some lower-technology work to a new plant in Mexico and British Columbia-based Avcorp Industries is looking to place some aerostructures work in Asia or Mexico. At the same time, the Canadian dollar remains weaker than the euro, creating the potential for work to be shifted from Europe to Canada.
"The civil market base worldwide only buys in US dollars, and we produce mainly in euros," says Marcel Picciotto, president of Thales's Canadian operation. "One element being looked at is to move work into or closer to US dollar-based markets. Canada may not be the USA, but the pay scales are less for similar jobs."
Defence resurgence
The domestic defence market, meanwhile, is undergoing resurgence under the new government's Canada First procurement plan, which includes four Boeing C-17 strategic transports, 17 Lockheed Martin C-130J tactical airlifters and 16 Boeing CH-47F heavylift helicopters. They are valued at C$13 billion, including acquisition and 20 years of in-service support (ISS).
These procurements are expected to bring business to Canadian companies because of the government's requirement for industrial and regional benefits - offsets - equal to 100% of the contract value. These deals are complicated, and controversial, as the concentration of the aerospace and defence industry in Quebec and Ontario makes regional distribution of the benefits a political problem.
The first of the contracts, a C$869 million deal with Boeing for the C-17s, was signed in February. The US company has identified C$577 million in industrial benefits, with four years to find the remaining 34% and 10 years to execute its obligations, says vice-president for Canada Al DeQuetteville. Separately, Boeing has five years to assemble the benefits tied to the estimated C$1.6 billion ISS package.
As the C-17, C-130 and CH-47 are off-the-shelf aircraft, and opportunities for direct work are limited, there is concern the government will settle for short-term benefits that generate jobs. "We need to focus on leveraging the procurement process to build strategic relationships with Boeing and Lockheed Martin across their commercial, defence and space businesses," says Boag. "We need long-term strategic work, not short-term legacy work technology transfer and long-term supplier deals, not bits and pieces."
The biggest opportunities for direct benefits are under the 20-year support contracts. "The government is looking for a single provider, which in their view is the OEM [original equipment manufacturer], which will in turn run a competition for the ISS," says Patrice Pelletier, president of L-3 Spar, which is targeting the C-130J. But concerns over the regional distribution of work has already led the government to separate out the C-130 and CH-47 training systems to run its own competition between Canadian companies.
Industry also wants the government to buy the technical data for the C-130J and CH-47F, as it has done in the past, so it can develop the ability to sustain and upgrade the aircraft independent of the manufacturer. "It can't be just low-value labour work," says Boag. "We need to get the intellectual property to build centres of excellence." L-3 Spar and L-3 MAS exist because Canada bought the data for the C-130E/H and F-18A/B and now have healthy businesses exporting their sustainment solutions to other operators.
"We want Canada to buy the technical data to permit industry to develop solutions and export its knowhow," says Pelletier. Sister company L-3 MAS is also responsible for ISS on Canada's new Sikorsky MH-92 maritime helicopter programme. Says president Sylvain Bédard: "Canada did not acquire the data for MHP, which limits our possibility to support the aircraft."
Arms regulations
Industry is also pushing the government to tackle a problem that cuts to the heart of what it means to be Canadian - restrictions imposed by the US International Traffic in Arms Regulations. Although Canada has a limited exemption, industry leaders say US companies are reluctant to use it because of the system's inconsistencies while some accuse their counterparts across the border of using ITAR as a protectionist measure.
But a bigger concern is that ITAR rules permit only Canadian-born citizens to work on US military programmes. In a culturally diverse country that upholds the right to dual nationality, ITAR restrictions are a problem for industry. Teams have to be rearranged so that only Canadian-born employees work on US programmes.
Boag says the industries and governments on both sides are seeking a solution. This is crucial for Canada's industry, which has the opportunity to compete for up to C$8 billion in industrial participation on the JSF - a programme that could drive the aerospace industry's sales to new heights in coming years.
Source: Flight International
