Canadian Defence Review
August 18, 2014
Atlantic Canada 2014 Aerospace and Defence Report
Regional defence contractors turn focus toward exports
While Atlantic Canada’s defence industry stands out from other regional groupings, in recent months, its similarities with them have come to the fore. “The big news here, like in the rest of the country, relates to the federal government’s new defence procurement strategy,” says Gordon Gale, executive director of the Aerospace and Defence Industry Association of Nova Scotia (ADIANS). “The focus on industrial technical benefits (ITBs), value propositions and key industrial capabilities should considerably boost our export capabilities. That has many of our members very excited.”
A quick look at a map reveals Atlantic Canada’s key role in the country’s defence, which for most of its existence was dominated by developments in Europe. In that environment Halifax emerged as the country’s most important naval port and remains so today, despite the fact that Canada’s pivot is shifting west.
According to the Atlantic Alliance of Aerospace and Defence Associations (AAADA), the region boasts the country’s highest defence concentration. That includes seven military bases, 24,000 personnel and a $1.6 billion operating budget. It should thus not be surprising that a thriving group of industry production, research and development and support players ranging from Lockheed Martin, to L-3 Communications, General Dynamics and many others would have set up operations in the region.
A naval center of excellence
Irving Shipbuilding’s Halifax Shipyard is the region’s central defence sector asset. So dominant is its importance as builder of the combat portion of Canada’s projected National Shipbuilding Procurement Strategy vessels, that the company dwarfs the AAADA’s other 150 members, many of whom partner with Irving or get sub-contract work from it.
According to Kevin McCoy its president Irving Shipbuilding which is in the midst of a $300 million facilities upgrade to prepare for NSPS construction, has given out nearly $150 million worth of sub-contract work to Nova Scotia companies. That total is even higher when other Atlantic Canada contractors are included and will increase once production of the Arctic Offshore Patrol Vessels, the first NSPS ships scheduled to be built, begins starting in 2015. “Modernization activities at the yard are progressing on schedule,” says McCoy. “The bulk of the steel has been erected for the new Assembly and Ultra Hall fabrication building.”
Composites Atlantic: adjusting to Harper Government delays and cutbacks
That said Atlantic Canada’s defence industry continues to suffer from the Harper Government’s slashing of vital programs. Beginning with the implementation of their current budget, the Tories have re-focused on a medium-term plan to make room in their upcoming budget so they can promise voters goodies prior to next year’s planned election.
The lion’s share of these cuts, (cleverly marketed by Jim Flaherty, the late Finance Minister, as “spending shifts into (unspecified) later years,”) have come at the expense of the defence industry. As the National Post recently pointed out, Canadian defence spending has now fallen to less than 1% of gross domestic product, the lowest level in history.
While there has been plenty of talk and paper shuffling, none of the major combat fleet replacements promised in the Harper Government’s Canada First Defense Strategy (announced in 2008 in Halifax) have materialized. With plans for surface combat ships, maritime patrol craft, fixed-wing search and rescue aircraft and fighter aircraft endlessly re-drawn, re-specified, delayed, cancelled or modified, suppliers are forced to maintain capabilities on their own.
In the aerospace sector, Composites Atlantic, which had been gearing up to supply machining services and fuselage panels for the Joint Strike Fighter program, has been increasingly turning to civilian assignments. “We are constantly losing opportunities because Canada is not committing to JSF,” says Claude Baril, the company’s president. “Competitors in other countries that have signed on are naturally putting pressure to get work on the program and so our hands are tied.”
That said Composites Atlantic remains ready to go if called upon. “We are keeping busy,” says Baril. “In fact profitability and hiring are going great and we have landed a lot of new work from mandates on projects such as Bombardier’s Global 8000. However the JSF work that we are losing will never come back.”
Shifting towards exports
Many Atlantic Canadian contractors are thus looking outside the province, even outside the country, for work. “We get little or no business here,” says Scott Richardson, vice-president (product management) at CarteNav, which produces situational awareness technology for military, law, enforcement, search and rescue and civilian applications. “However we are seeing considerable success internationally. Our AIMS-ISR software is now used in more than two dozen countries.”
CarteNav also works a lot with channel partners, primarily sensor partners, such as Wescam. The company’s software takes the inputs from these sensors, combines it with radar tracking data and other information and projects everything on a visual display, that users, ranging from contract ISR-providers, to fire-mappers and other operators can draw on to do their jobs. “We have 20 or so people working out of our Halifax office,” says Richardson. “We are quite proud of the technology that comes out of this little town.”
Provincial Aerospace Limited: learning foreign marketing
However exporting is complicated. Those who do so, such as Provincial Aerospace Limited, which continues to leverage its success in the United Arab Emirates, develop in-depth knowledge of their markets. The company is currently fulfilling a sustainment contract stemming from its supply of two long-range maritime patrol aircraft, as well as bidding on intelligence, surveillance and reconnaissance (ISR), maintenance repair and overhaul and other such contracts. A key mandate includes another UAE order to integrate satellite communications systems in the country’s air defence forces.
However exporting has its own set of demands, some of which are political in nature. To help increase Provincial Aerospace’s profile and to open doors domestically and internationally, the company recruited ex- Chief of the Defence Staff Rick Hillier, who now serves on its board. Brian Chafe company’s CEO recently brought Hillier along to honour his Excellency Mohammed Saif Helal Al Shehhi, the UAE’s ambassador to Canada at a recent diplomatic ball in Ottawa. These small gestures, which all major exporters inevitably make, can create important connections that can ease mandates and generate new work down the line.
Cormer Industries: riding shifts in the Canadian dollar
According to one important sector player, another big challenge that faces Atlantic Canadian defence exporters and manufacturers relates to navigating shifts in the loony, which has fallen from its recent high against the greenback, and was trading in the USD $0.93 range as these words were being written. “Currency shifts can be a double edged sword,” says Leo Sousa, president of Cormer Group Industries, which is currently in the process of setting up a new production facility in Miramichi New Brunswick scheduled to open in September. “The drop makes Canadian exports cheaper in foreign markets however it also makes imported components more expensive.”
Cormer, which plans to build drive train assemblies, retrofit Light Armoured Vehicles, and to team up with other supply chain partners to seek out new mandates, thus adopts a balanced currency management approach says Sousa. That includes shooting for a “natural” hedging policy in which imports and exports are balanced, to even out the effects of currency swings. However Sousa does not shy away from implementing a formal hedging program if one side of the equation begins to shift out of whack.
IMP Aerospace and Defence: punching above its weight
The influence of many Atlantic Canadian defence players extends far outside the region. For example Halifax-based IMP Aerospace and Defence, became one of the country’s most important defence contractors in late 2012 following its acquisition of Cascades Aerospace, which does key maintenance work on Canada’s military transport aircraft.
IMP’s Naval and Land services, centered at the company’s Halifax facilities supplies full support to Canada’s search and rescue helicopters and the company continues to generate new work. In June IMP Aerospace Technical Publications announced that it was recently selected by Lockheed Martin to provide electronic technical publications for the C-130J Hercules Transport aircraft. The company also simultaneously announced the win of a two-year deal to provide engineering support to the Canadian Coast Guard.
Technology and miscellaneous
According to one expert, one of the more counter-intuitive realizations regarding Atlantic Canada’s aerospace and defence sector relates to the surprising availability of highly-skilled, technical professionals in the area. “Halifax, where many of our employees are based, is very much a university town,” says Derrick Rowe, chairman of Bluedrop Performance Learning, which develops training and simulation tools for Canada’s army, navy and air force. “We also profit from the fact that the quality of life in the region makes it very easy for us to attract people to come and work here. That applies both to newcomers, but also to those from the region who studied elsewhere but who will literally rush back if given half the chance.”
Bluedrop’s work on initiatives such as the Sikorsky Marine Helicopters, the Arctic Offshore Patrol Ships and the C-130 transport programs has made it somewhat of a regional icon. The company consolidated its position even further late last year, when it acquired the shares of Atlantis Systems Corp., a local competitor. “The deal made sense on a number of levels,” says Rowe. “We generated numerous efficiencies and, although we had to eliminate some overlap, we are now in a far better position to service our clients.”
Bluedrop, which partners closely with CAE on a number of initiatives, is also in an excellent position relative to many of the firm’s competitors, in the current tight fiscal environment says Rowe. “New innovations such as high quality 3-D gaming are making simulation technology an increasingly efficient and effective training solution” says Rowe. “We are thus seeing increasing demand from many quarters.”
FFG: received with open arms
In short the future looks bright, says the Atlantic Alliance of Aerospace and Defence Associations, which highlights several of the region’s key advantages, in its attempt to attract new players. These include among the lowest business and electricity costs of any region in the G-7 nations, labour costs that are 18% lower than in the United States, and some of the cheapest land construction prices in North America. As if that were not enough, the effective tax rate on companies that locate in Atlantic Canada are lower than in the United States. Furthermore Canadian-based businesses don’t have to finance employee health care plans as those in the US must.
The advantages of locating in Atlantic Canada are considerable says Ulf Behrens, general manager of FFG Canada, which is currently completing the set-up of a production facility in New Brunswick. There it will do assembly work on the WISENT 2 AEV aadvanced multi-functional vehicle platform, which is based on the Leopard 2 tank, one of the world's most successful tracked vehicles. However the human factor was also important. “The people of New Brunswick greeted us with open arms,” says Behrens. “It was a warm and open welcome, maybe because the defense industry here is seen in a different way than in Germany.”
Apex Industries: focused on the future
Indeed the mood throughout Atlantic Canada is surprisingly good says Keith Parlee, chief operating officer at New Brunswick-based Apex Industries, which employs 250 people at a diversified, 250,000 square foot steel door, hardware and contract equipment manufacturing facility.
“The past year has been one of building, preparing and business development efforts,” says Parlee. “We see solid opportunities in a variety of programs, particularly NSPS, as the Halifax Shipyard is located just a couple of hours away. “With billions of dollars worth of parts and systems to be procured in Canada during the next 25 years, we are committed to manoeuvring the various channels and partners to win defence contracts.” The company is also focused helicopter program and JSF, for which it awaits a decision.
Atlantic Canada’s aerospace and defence sector*
Annual revenue: (CDN) $1 billion
Daily exports: $107 million
Export growth: (2001-2007) 2007%
Military bases: 7
Annual operating budget: $1.6 billion
*Atlantic Alliance of Aerospace and Defence Associations
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Peter Diekmeyer Communications Inc.