Canadian Defence Review

 

May 2011

 

Title: Report on Ontario’s Aerospace and Defence Sector

Subtitle: With a slew of new DND procurements in the works, the outlook for Canada’s largest province’s defence sector hasn’t looked this good in a long time.

 

The Conservative Party of Canada’s stunning national election win will generate significant repercussions throughout the country. But few stand to benefit more than Ontario’s defence sector.

 

Right of center governments are traditionally defence-friendly and the Harper regime has been no exception. Its Canada First Defence Strategy made new procurement initiatives a priority. However, due to the Conservatives’ minority status, in past years, compromises with the other three major parties and short-term electoral considerations often forced defence-related initiatives onto the backburner.

 

Even when stuck in a minority position, the Conservatives already had a slew of major new land, sea and air procurement initiatives in the works. However there are good reasons to believe that a majority government will give them the clout to see many of those projects through.

 

That’s particularly true regarding the larger projects, such as disbursements under the National Shipbuilding Procurement Strategy (NSPS) (for which an estimated $40 billion in disbursements would stretch out over many years, if not decades), says one expert. “Our perception is that a majority government will be more stable and thus should be in a better position to do longer-term planning,” says Gordon Fleming, president of BMT Fleet Technology.

 

Craig Campbell, vice-president (business development) at DEW Engineering is also optimistic. “Ontario’s manufacturing sector took quite a hit in the last recession,” says Campbell. “You’d think that with the Conservatives owing their new majority status to the seats that they gained in Ontario (73 of the province’s 106 seats went to the Tories of which 15 were assigned ministerial positions), that the new members will have considerable clout when major decisions are made.”

 

That new political clout is a key reason that defence sector players in Canada’s most populous province could do quite well during coming years. Although governments generally try to hand out offsets and sub-contacting work somewhat equitably among the country’s regions, there is no denying the big debt the Harper government owes those Ontario voters and tax-payers.

 

Land Systems: CCV, TAPV, Trucks

Ontario’s biggest competitive advantage is of course its strong manufacturing base. This manifests itself most clearly in an automotive and truck sector that was battered considerably in the recent recession. The good news is that the Canadian government has committed to a slew of new land system procurement initiatives (ranging from Close Combat Vehicles (CCV), Tactical Armoured Patrol Vehicles (TAPV) to new trucks and upgrades to the Canadian forces’ venerable LAV IIIs), that will almost all lead to considerable direct or offset work done in Ontario.

 

“There is a lot of talk going around about Ontario being a designated (Industrial Regional Benefit) region on par with Quebec, Atlantic and Western Canada,” says Campbell. “With the troubles that we have been through it would make sense for the province to have a seat at the table.”

 

Frankly, DEW Engineering has been weathering those troubles quite well. The company’s 400 or so employees (half of which are based in Ottawa, and the other half in Miramichi New Brunswick) are already working on contracts such as Militarized Commercial Off the Shelf (MilCots) trucks and the Medium Support Vehicle System (MSVS). The company has also just signed new $8.7 million deal to supply bomb-resistant armour for front line military vehicles (LAVs). And that’s just the start says Campbell. ”With all of the projects that we are bidding on, we could see our business more than double in size during the next few years.”

 

General Dynamics Land Systems: the big elephant

Of course the big elephant in the room in any discussion of Ontario’s defence sector is General Dynamics Land Systems (GDLS), which employs 2,200 people across Canada. In fact GDLS, which is so big, that it is on good terms with all political parties, is in a particularly good position because three of the four Members of Parliament around its London Ontario locale are Conservatives.

                                              

The company, which was recently awarded the sole source $1 billion LAV III upgrade contract, also has a new leader: Danny Deep, will be the new vice-president in charge of GDLS Canada, replacing Dr. Sridhar Sridharan, who will now be responsible for GDLS international.

 

Deep will need to steer the LAV III upgrade program during the project definition process. Still to be decided are which improvements will be made to the venerable troop carriers. According to Ken Yamashita, the company’s manager (corporate affairs) possible improvements range from enhancing armour protection, firepower, new turrets, increased situational awareness capabilities as well as enhanced engine and drive train to accommodate higher payload.

 

Armatec consolidates its production

Of course General Dynamics Land Systems won’t be the only beneficiary of the LAV III upgrade program. Like most defence sector programs, the upgrades will involve sub-contracting work for a slew of specialized players that will be lining up to get in on the action. One of these is fast-growing Armatec Survivability Corporation, which already produces a wide range of products designed to improve armour efficiency, ranging from Rocket Propelled Grenade (RPG) fencing to passive Improvised Explosive Devise (IED) protection and specialized mine protection flooring solutions.

 

“Soldier survivability is (our ) number one priority,” says Kelly Dewaele, the company’s marketing manager. “We reinvest close to 13 percent of our revenues in research and development to support our engineering team, which is constantly trying to keep ahead of emerging threats.”

 

It’s a good business to be in. Armatec, which now employs close to 300 people, has been growing by leaps and bounds. Last November, to prepare for a slew of expected new business, the company consolidated its three existing facilities into a single, new, larger 300,000 square foot building in Dorchester, 10 minutes east of London. The new facility will include on-site testing capabilities including a drop tower and a test firing ballistic range.

 

New legs for the National Shipbuilding Procurement Strategy

One of Ontario’s biggest advantages from a defence sector standpoint says Fleming of BMT Fleet Technology, is the fact that the nation’s capital is located there. This has drawn almost all of the major sector players to set up sales offices in Ottawa to enhance proximity to the Department of National Defence. “You always want to be real close to your biggest client,” quips Fleming.

 

For example BMT’s office spaces have expanded over the years to include designers, engineers and research and development personnel to help answer request for information (RFIs), requests for proposals (RFPs) and other communications and business documentation related to the slew of naval projects that the company is involved with.

 

These range from its just-completed preliminary designs for soon to be purchased Arctic Patrol Ships and Joint Support Ships, to initial concept drawings for the Canadian Surface Combatant, which is expected fill in for the country’s destroyers and frigates, when they are phased out of operations. That said, the work is far from easy. “Because there have not been any major ships built in Canada for 20 years, a lot of the design, engineering and production knowledge has disappeared,” explains Fleming. “However hopefully, with the NSPS getting up on-steam, that will start to change.”

 

CSMG: ramping up at warp speed

The Canadian Submarine Management Group, a division of Babcock International Group PLC, is another defence sector contractor which has a significant Ontario presence due in large part to a desire for proximity with key Ottawa decision makers. The company is presently doing in-service support (ISS) work on  the four nuclear powered submarines that Canada bought from Great Britain, including extensive dry-dock work on the HMCS Chicoutimi, which caught fire several years ago.

 

Yet despite the fact that the work on the Chicoutimi is essentially naval-related, fully 75 of CSMG’s160 employees, including corporate, engineering, procurement and financial staff are located in Ontario. Michel “Butch” Bouchard, CSMG’s president, agrees that Ontario will be a major beneficiary from the extensive procurement that will take place during coming years, but adds that a lot of its success will depend on how well potential Canadian ISS partners can team up with the many overseas suppliers from countries such as France, Germany the US and the UK that will be bidding on many of the contracts.

 

“They (overseas players) know that if they want to do business in Canada that they have to have more than a post office box here,” says Bouchard. “That means they need a Canadian presence or partner. We are here to help them get that.”

 

Thales: defence and non-defence work

Of course not all of Ontario’s defence players focus their efforts solely within the sector. Many, such as Thales Canada, do significant work outside as well. In fact only 270 of Thales’s 1,400 employees are in the defence sector (though that total is projected to rise to 300 by yearend) with another 1,000 people at its rail signalling division and 150 in its Montreal aerospace unit.

 

“We continue to grow like crazy, the market is booming and we have won just about everything that we have bid on,” says Dave Spagnolo, the company’s vice-president (defence and security). Those contract wins include a $50 million project to do systems integration work on tactical control radar brought into Canada from France and a $11 million win on the Interdepartmental Maritime Integrated Command Control and Communications (IMIC3) system for coast guard vessels.

 

That said, Spagnolo agrees that the federal government’s extensive procurement plans are not just benefitting Ontario companies. “The re-capitalization is attracting attention from naval, air and vehicle providers around the world,” says the industry veteran. “What we need to do is to figure out how to best add value in that environment.” 

 

Export potential (AIR)

Yet despite the fact that major players suck all the air out of the room when talk turns to the defence sector, it is the small, export oriented players, who rely the least on Canadian tax dollars to justify their existence that generate the biggest economic bang for the buck. One such company is Highland Integrated Surveillance Systems Inc. (HISS). The company, as its name implies specializes in the integration of surveillance systems, such as cameras, sensors and ancillary equipment into airborne platforms.

 

According to its president Roger Smibert who spoke to us just after getting back from a trip marketing the company’s wares at a trade show in Brazil, demand is booming. “We are seeing a dramatic rise in interest from armed forces and drug interdiction services, particularly in the Middle East, but also in Asia, which we service from out Abu Dhabi facility,” says Smibert.

 

Of course Smibert hasn’t ruled out getting more work in Canada. “We are keeping our eye on the marketplace at all times,” he says. “We are just keeping busy doing other stuff at the same time.”

 

In fact Ontario companies of all kinds are increasingly making their presence felt on the global stage says Lynn Bamford, vice-president (general manager) of Curtiss-Wright Controls Embedded Computing. “It’s not surprising since many have long been recognized as market leaders in their field of expertise.” In fact Curtiss-Wright’s embedded computing group, which manufacturers many of COTS products for the aerospace and defence sector in Ontario has done particularly well in this area, recently adding 30,000 square feet of production space to its existing facility.

 

Defence v. public finances?

 

Of course while the outlook for Ontario’s defence sector is good, nothing is written in stone. Previous periods of high optimism have often met with disappointment. In fact several defence sector suppliers either would not comment, or expressed worries as to how long the current positive outlook will remain, given the government’s extensive financial commitments and its vow to exercise fiscal discipline during the coming years.

 

“The corollary (to all of the procurement plans) of course is that the Harper government is committed to meeting its deficit targets and when financial austerity reigns, defence budgets are often the first hit,” says Fleming of BMT Technologies.

 

You can bet that there are a lot of defence sector stakeholders who are praying that that does not happen anytime soon.

 

 

Peter@peterdiekmeyer.com

 

-30-


Home | Gazette articles | Finance/Economics | Foreign affairs | Defence | Magazine/ Gvmt | Book reviews

peter@peterdiekmeyer.com

© 2011, 2010, 2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998

 Peter Diekmeyer Communications Inc.