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Crossroads: Aerospace and space industries face new challenges to compete

In the past five months, the federal government has accepted two reports that could significantly change the Canadian aerospace industry. In November 2012, David Emerson, a former Cabinet member and CEO of Canfor Corporation, delivered a two-part report on Canadian interests in aerospace and space. In February, Tom Jenkins, the executive chairman and chief strategy officer of Open Text, produced a report on defence procurement through better use of key industrial capabilities. Jim Quick, president and CEO of the Aerospace Industries Association of Canada and a former assistant deputy minister in the government of New Brunswick, spoke with editor Chris Thatcher about the reports and their long-term impact.

How would you assess the health of the military aerospace industry today?

Canada has a strong relationship with the U.S. defence industry and what affects them does affect us. So no doubt some of the difficulties we see south of the border with defence budgeting and sequestration will trickle into our own industry. The key in Canada is to have clarity as to how we should be setting and funding our defence priorities. The Canada First Defence Strategy provided a lot of positivity in the industry, and we look forward to seeing how the implementation of both the Emerson report recommendations and the recent federal budget measures surrounding key industrial capabilities will help us increase our global competitiveness.

Given the percentage of Canada’s aerospace industry that is small- and medium-sized (SME) companies, do changes in the U.S. supply chain represent a major concern or an opportunity?

I would say both. We have around 700 companies and the lion’s share are SMEs, so AIAC has reprogrammed a lot of our services to focus on helping small business, on supply chain development and on market development programs that allow us to compete globally. We have a huge market access/market development program to help bring our members into other jurisdictions like Brazil, Russia and China. We fully understand that emerging markets are going to be building their own aerospace and defence industries, but there is a significant amount of work to be done in those jurisdictions and that allows for countries like Canada to play a role inside those emerging economies. Canadian small business has been focused and strategic in niche areas on developing products that can go on global platforms. But as we heard at our Canadian Aerospace Summit, we have to adapt more quickly. And that’s why you have David Emerson’s report and Tom Jenkins’ report.

During his presentation to the Summit, Emerson painted a pretty challenging picture for Canadian SMEs as OEMs adjust their supply chains and emerging markets build their own sectors. What’s the takeaway from his report for AIAC?

If you want to compete globally, you have to be on the technology and innovation edge. And that’s where he based a lot of his recommendations. I think Industry Minister Christian Paradis and the government understand where we are and what we want to achieve. One of the things that we need to do – and David focused on this – is look at all those government programs and policies to see what we need to change to drive innovation, technology development and increase intensity on R&D. That then will allow us to position ourselves globally.

Technology development, innovation and market access feature prominently in his first 12 recommendations. What’s been missing to date?

David focused on several things and one was technology development and innovation. That links to industry’s commitment to R&D and more competitive government programs like SADI (Strategic Aerospace and Defence Initiative). Number one, he said we need to recapitalize it and, two, we need to change the terms and conditions to make it more competitive. He also talked about programs like technology demonstration – there is a huge competitive advantage for those countries that have them. Both of these things were included by the government in the budget, so we are very happy to see that they agree with the urgency of these issues. David also addressed export controls: 80 percent of what we manufacturer in Canada goes into exports, so how things are treated at the border and issues around export controls are critical to our success. Our ability to certify our aircraft and aircraft components and parts is another critical area.

On market access, he raised economic diplomacy. When you look abroad at countries like France and Germany going to China and other emerging economies, it is their political leaders who are helping sell their industries. Prime Minister Harper and his government have made significant strides in this area but we’ve got to be better because it is a key piece to being globally competitive. Then there are issues of upgrading and up-skilling our people. In every jurisdiction, the first question you get is how are you generating the skills and the people you need to be competitive? And it’s not just the aerospace industry: the Canadian Council of CEOs and the Canadian Chamber of Commerce have recognized the importance of this.

Where do you turn to enhance your skill set?

Academia is a major partner, so are the provinces and the federal government. One of the recommendations coming out of the aerospace people and skills working group report is the need for a national approach to how we deal with people and skills. There are some good pieces out there: NSERC (Natural Sciences and Engineering Research Council of Canada) does good work, the universities do good work, some of the colleges are closely tied to the aerospace industry – some of their classrooms are in our facilities – but we need a national strategy for how we are going to move forward with the up-skilling and development of our people. It’s not just different entities doing their thing; we need to come together collectively to make sure we get this right. The money that countries like China and India are putting into developing engineers, for example, is huge. We do not have the same resources so we have to be more nimble, more focused and more strategic.

Both Emerson and Jenkins recommended establishing priority technologies and key industrial capabilities (KICs). Canada is already recognized for certain niche expertise. How would this change the sector?

You could say because we are seen globally as having world leading capabilities – in business jets, landing gear, simulation or small engines, and now on the environmental technology side – industry looks to Canada for certain expertise. But in terms of technology and prioritization, KICs are key because they help us identify and bring clarity to what the priorities should be. David suggested a list of priority technologies that is focused on where should Canada be in terms of the global supply chain. If we try to be all things to all people, then that is what it will look like. If we’re strategic in our key industrial capabilities, how that transfers into prioritization of technologies, then we’ve got a good opportunity to maintain our stature as a world leader. David recommended this because he clearly felt, with our limited resources for technology development, we need to make sure they go to the right kind of technology.

I think you’ll see Canadian industry continue to focus on those niche areas, to further refine and invest more in innovation and technology development. But I also think you’ll see us in new areas where we will be taking on a global leadership role – composites would be one, for example, with the work being done in Manitoba and Nova Scotia. What we are trying to do through our long-term projections is understand how to get in front of those technology developments. This is why programs like technology development and changes to programs like SADI are important – they are tools to get there.

A number of high-profile aerospace projects are currently experiencing delays. In your view, are there fundamental problems with defence procurement?

I think it’s generally felt that people see our procurement process as broken and it needs to be fixed. I think government believes that as well or they wouldn’t have asked David and Tom to do the work that they did. We all agree – government, industry and other related stakeholders – that there needs to be change if we’re to be successful. David looked at procurement from an innovation and technology development standpoint, whether through industrial regional benefits (IRBs) or in-service support (ISS). AIAC believes we should be using ISS and IRBs to drive technology and help build Canadian industry capacity. I don’t think we put that ahead of the safety of our men and women in uniform, but there’s no reason why we can’t, as we are looking to procure the best equipment possible, also look at how we can build capacity. We believe there needs to be a long-term industrial strategy for how we are going to procure and, within that, how we ensure we are building Canadian capacity and maximizing industrial benefits.

Is the current use of Secretariats – for CF-18 replacement and fixed-wing search and rescue – a viable solution or a short-term patch?

There is certainly some benefit to having procurement under one roof. But it depends on what kinds of capabilities you are going to put under that roof. You need the right people with the ability to make decisions in a manner that they need to be made. The [National Fighter Procurement Secretariat] has some excellent practitioners and we’re confident that they will be able to do the work. And the government has been clear that they have a plan for moving forward. We’ve been supportive of it but the devil is always in the details. But that’s a very specific procurement. I think we need to look at procurement under a larger umbrella and, whether it is land, air or sea, determine the best model for Canada and move on. You can look back and blame whoever you want, but that’s not going to get us very far. I’m prepared to look at any scenario that helps with the procurement process.

Emerson recommends that OEMs partner with Canadian companies to provide the necessary intellectual property for in-service support. OEMs have generally been disinclined to do that and the government has generally declined to purchase the intellectual data rights for major weapons systems. AIAC represents both OEMs and SMEs. How do you balance that issue with your members?

I think we all agree on what the result needs to be. We need a stronger Canadian industry and more and better jobs. How we get there is where we are going to have differences of opinion. For AIAC, the transfer of necessary IP so that we can do high quality work and drive high paying, high skilled jobs is something we’ve always advocated. Our committees will look at how best to implement each of the recommendations, but we’re focused more on the outcome than the process. Whether it is Tom’s report or David’s, there will be disagreements about the process but I think we can agree on what it should look like at the end of the day. What we want is a procurement system that delivers IP transfer that allows us to work at a high skill level and allows us to have significant in-service support for our fleet, and from an IRB standpoint or technology benefits, allows us to drive technology exportation and innovation.

The report also emphasized the need for stable funding and project scope for the Canadian Space Agency, and it has been argued at AIAC conferences that government needs to be a better first buyer. Has Canada been falling behind in space-related capabilities?

We’ve put a lot of emphasis on space because we believe there needs to be a change in how we do space business. As David said, industry feels it is at a crossroads. I think he has the right approach: what’s the governance around space and space decisions in Canada? How do we do prioritization? How does the prioritization get on the government agenda? And then how does government prioritize this? Once you get that structure and governance right, then you look at how we should support and resource industry. I think there is a lot in David’s report that if we are to undertake will make a huge difference in the space industry.

Like other jurisdictions, one of the biggest program funders in Canada is government. And where things get into trouble is when projects are over budget or delayed or not delivered on time – on RCM (RADARSAT Constellation Mission), we saw some companies lay off some of their best talent because we weren’t getting to a decision quickly enough. I understand government’s standpoint, that they have to do their due diligence and make sure that it is the right program with the right cost. A lot of what David is recommending helps us solve these issues. But I think we only have one chance at this. Canada has had a huge reputation as one of the leading space-faring nations. We were third behind the Russians and the U.S. in space travel and we are partner on the international space station – a Canadian is the current ISS commander. And through our partnership with NASA over the years and our role on the space shuttle program, we’re definitely punching above our weight. But all of this is at risk if we can’t right our space ship.

The Canadian Forces have significant space requirements. What’s the future of the Canadian space industry if we don’t act soon?

If we don’t act relatively quickly and don’t do the right things that David has recommended, I think we are in big trouble. But I’d rather look at it the other way. If we get it right, which I think we can, there is reason to be very optimistic for the future of the space industry. I have faith in David’s recommendations and the initial feedback from government suggests they are very much committed to space. They recognize that if we are to open and develop the North, space will play a huge role. It is important to our sovereignty and security. We are the best in the world at communication satellites, at robotics, and our sensing capability is among the best in the world. We’ve got other jurisdictions wanting to partner with Canada because they see us as a leading space nation. So our opportunity is now, but if we don’t take advantage of it then I think we are in trouble.

Author: Chris Thatcher (from Apr/May 2013)

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