Title: Report on Ontario’s Aerospace & Defence Industry
Sub-title: Ontario companies have been big winners in Canada’s drive to modernize its Armed Forces
When the Canadian government released its Canada First Defence Strategy earlier this year, the idea was to base the country’s military on four pillars: personnel, infrastructure, readiness and equipment.
“Over the next 20 years, six of the CF’s core equipment fleets will reach the end of their operational lives and will need to be replaced,” read the policy backgrounder. “These include destroyers, frigates, maritime patrol aircraft, fixed-wing search and rescue aircraft, next-generation fighter aircraft and a new facility of land combat vehicles and systems.”
What the policy document did not explain was how big the substantial potential benefits from this expansion would be for Canada’s biggest province. At bases such as CFB Borden, CFB Kingston and CFB Petawawa, CFB Trenton and CFB North Bay, Ontario already hosts some of the country’s largest Air and Land Forces installations. However the capabilities of Ontario’s defence sector companies and the vast network of subcontractors that support them, are equally impressive.
A good mix of defence sector businesses
“There is a very good mix of defence sector businesses here,” said Brian MacDonald, a defence policy analyst with the Conference of Defence Associations. “On one hand there are a slew of top level manufacturers. However the main long-term pattern has been for the Canadian companies to set themselves up as Tier II suppliers of specialized components or subsystems.”
Janet Thorsteinson, vice-president of government relations at the Canadian Association of Defence and Security Association agrees. “This trend should come as no surprise,” says Thorsteinson. “In any complex manufacturing supply chain, the degree of sophistication demanded is so high, that specialization within various component production sub-chains vastly increases overall efficiency.”
Ontario’s strengths in the defence industry roughly reflect the competitive advantages of its industrial sector in general. The province benefits from a highly-skilled, educated, dedicated and innovative workforce. Yet while Quebec has a strong aerospace industry relative to its share of the Canadian population and Atlantic Canada and British Columbia are strong in the shipping industry, Ontario stands out in particular for its impressive capabilities in the vehicle production and components sectors as well as for its overall manufacturing sector prowess.
In fact despite the severe challenges that have plagued central Canada’s manufacturing sector during recent years, several international defence sector giants continue to conduct manufacturing operations at Ontario production facilities. Like major U.S. automakers, many are lured in part by Canada’s free medicare system, which saves them the substantial health care costs, which, in the United States represent a significant proportion of worker salaries.
A leader in armed forces vehicle production
There are few better examples of the crucial role that Ontario plays in Canada’s defence industry than General Dynamics Land Systems, manufacturer of the LAV III, the light armoured vehicle which has become a staple of the country’s ground forces. Earlier this year when Canadian Defence Review’s editorial board wrestled with its choice for the country’s number one defence company, the magazine decided to recognize Canadian-based players not just based on their revenue size or the number of jobs that they created, but also for their innovative capacity. However GDLS scored high on all counts.
“GDLS is the only Canadian company that manufacturers armoured vehicles,” says Tom De Fay, the company’s Manager of Marketing and Communications. “However our success isn’t just limited to here. We are also proud to claim global leadership. In fact only 15% of our revenues stem from Canadian requirements. The rest is entirely due to exports.”
GDLS owes much of its current success to its early recognition of a major trend in military conflict: the shift in demand growth toward light armored vehicles. “In the years after the Cold War ended, the U.S. Army Chief of Staff General Shinseki decided that the forces needed to be lighter and more maneuverable, which led to the founding of the Stryker Program,” said De Fay. “That turned out to be the biggest contract that we ever won.”
The numbers are impressive. Close to 7,000 LAVs, including 3,400 Strykers, have been ordered or are already in service and much of the work on these units was performed by the 1,800 employees at its London Ontario plant. “It’s a very competitive business,” admits De Fay. “All products are built to order for the customers. The key factors that they are looking for are delivery time, price and performance and of course they want you to be tops in all three.”
Another excellent piece of news says De Fay is the positive feedback that he has been getting regarding the performance of the LAVs and the Strykers in their deployments in Iraq and Afghanistan. “They have been very well received,” says DeFay. “Military technology has evolved rapidly over the years. However these vehicles are extremely durable and have long service lives. As a result, they will face several generations of evolving missions and challenges. The threats we are seeing today are not the same ones that we saw just a few years ago.”
One new strategy that Canadian soldiers must deal with is improvised explosive devices (IEDs). These were hardly on anyone’s radar screens prior to 9-11, but they have evolved as a key threat to Western forces. As a result of the feedback that GDLS has been getting, the company has been developing enhanced armor protection solutions. These would involve installing a stronger drive line, which would raise the LAV III’s potential weight from 40,000 to 55,000 lbs. so that they could carry the enhanced protection.
A vast network of sub-contractors
When looking at Ontario’s defence sector’s footprint it is tempting to look primarily at provincial data regarding the industry’s direct economic impact. That would be a mistake says Mike Greenley, vice president of strategic planning and business development at General Dynamics Canada. “It’s important not to forget that we provide work for a broad range of sub-contractors that are located not just in Ontario, but in all of the Canadian provinces except one,” says Greenley. “Overall we make about $600 million in annual purchases from about 800 Canadian suppliers, of which about half are located in Ontario.”
Like GDLS, a major chunk of General Dynamics Canada’s 2,200 employees are also situated in Ontario, including 1,500 at its head office in Kanata. General Dynamics Canada provides products and services in numerous areas, including for the Army’s land command support program, the Aurora modernizations (notably the missions systems) as well as for the Marine helicopter initiative. The company also offers substantial systems integration capabilities.
However the one element that Greenley appears particularly proud of is the company’s strong export record. “More than 50% of our revenues are derived from outside of Canada,” says Greenley. “For example we have delivered to 21 countries and most U.S. Army vehicles, including the Strykers, the M-1s and the Bradleys have computers or displays in them that are produced in Canada.”
But it is not just Ontario’s manufacturing sector prowess that impresses the defence industry exports. “Ottawa for example has a great overall technology base and we have always been part of that community,” says Greenley. “In this business, if you don’t innovate, you quickly fall behind.”
L-3 Wescam: Turning brainpower into defence capabilities
One growing company that exemplifies the innovative nature of Ontario’s defence sector is L-3 Wescam, which has become a world leader in the provision of visual information systems. The company’s products deliver exceptional value in precision optics, gyro-stabilization, digital and analog transmission and reception and custom-fitted system integration.
In layman’s terms, L-3 Westcam manufactures turrets and stabilization systems that are mounted on aircraft or helicopters. The company has substantial systems integration capabilities and can package together surveillance devices such as infra-red cameras, EOY zoom and low-light television, as well as laser products such as range finders, pointers and illuminators. This summer L-3 Westcam announced that it won a $25 million contract to provide imaging systems for the INGRESSS CH-146 Griffon helicopters.
According to one L-3 Wescam booster, exports have also grown rapidly. “There has been a large pull from the United States Defence Department for ISR assets. In particular, they want to get more eyes in the sky over Iraq to help support their ground mission and we have been seeing large orders as a result,” says John Dehne, L-3 Wescam’s president. “This is having an effect on our workforce and we will almost certainly have to significantly beef up our staff.”
L-3 Wescam currently employs about 525 people at its assembly and test facility in Burlington Ontario and its optical lens production facility in Don Mills. Both are ideal locales says Dehne. “We are in a very knowledge-intensive industry and we employ more than 100 engineers. So finding and maintaining our talent base is a full time job. The good news is that we sit in areas bounded by good universities and technical schools such as McMaster University, the University of Waterloo and the University of Toronto. The Canadian government also supports a special program for optics in the Niagara region. These give us a good base for us to draw new staff from,” says Dehne. “This will be even more important to us if the Chinook C-47 program goes forward as we are hoping it will.”
Yet despite all of the advantages of L-3 Wescam’s Ontario locale, according to Dehne, the province’s defence sector could provide even more added value if the industrial and regional benefit rules that govern the procurement process were modernized.
“We are providing good jobs to our employees that have good benefits attached to them,” says Dehne. “However the system as it is currently structured, does not give credit to companies like ours that produce enterprises that add lasting value to the economy. We are ranked like any “build-to-print,” facility. However there are clear differences between the two approaches and these should be recognized.” That said, adds Dehne, the Ontario government has been very proactive in providing support through their innovation programs.
Lockheed Martin: Frigate modernization program
Another company that is a big booster of Ontario’s manufacturing sector and information technology capabilities is Lockheed Martin Canada. The company currently hosts about half of its 450 Canadian employees at its Kanata facility where it does work in combat systems, C4ISR and product support. However those numbers are slated to rise substantially.
In early September, the Canadian government announced its intention to award $2 billion worth of long-term contracts to Lockheed related to the provision of Combat Systems Integration Design and Build and in Service Support elements for the modernization of Canada’s 12 Halifax Class navy frigates. “We feel a bit like the dog that caught the car here,” joked Mike Barton, the company’s communications manager. It’s still very premature to talk about this too much until the deal is signed. “However this is clearly great news for our company and great news for Ontario.”
Looking towards the future
According to the Conference of Defence Association analyst though despite all of the Ontario defence industry’s real strengths, there are some threats on the horizon. “The rise in the Canadian dollar over the past several years has created some severe challenges for many Canadian exporters, including those in the defence sector,” says Brian MacDonald. “That’s particularly true in case for companies whose customers can choose between Canadian or American suppliers because the relative cost of labour here thus expanded significantly. The effect is particularly pronounced in manufacturers that have a unionized workforce.”
Another interesting challenge that the Ontario defence industry faces stems from the lack of effective regional representation. While several agencies and lobby groups speak regularly on national issues, the thin provincial representation makes means that there are few highly visible people to speak out on issues of concern to Ontario companies such as the allocation of industrial regional benefits (Ontario is considered a “have” province when it comes to IRBs, so when choice opportunities come up, they tend to be awarded to other regions).
Yet MacDonald remains optimistic. “This sector includes many excellent and innovative companies,” says the long time defence industry watcher. “I am convinced that the industry will overcome all of the difficulties that are placed in its path and Ontario defence companies will do very well in the coming years.”
Peter Diekmeyer (firstname.lastname@example.org) is a senior writer at Canadian Defence Review.
|© 2005 Peter Diekmeyer Communications Inc.|