Canadian Defence Review

 

September 18, 2014

 

Ontario aerospace and defence report 2014

Defence firms are slowly adapting to Harper Government cuts. However many are looking to the post-2015 election period.

 

Stephen Harper talks a good game. When international crises hit, Canada’s Prime Minister jumps in front of the camera to lecture and threaten. Russia, Iran, the Middle East and China have all drawn his scorn. But with a federal election looming, the enemies that Tories are most worried about are Liberals and New Democrats.  So tough talk has masked big defence cuts, which Harper is relying on to eliminate the deficit and fund election goodies.

 

Throwing Canadian defence under a bus is a risky strategy, particularly in Ontario, which was hit hard by the last recession. The Conservatives need to hold Canada’s largest province if they hope to form another majority. However (as CDR went to press) they were trailing in polls. The party’s attitude towards defence sector manufacturers there provides a good case study as to why.  

 

For one, Ontario defence producers, most of whom are generally friendly to whoever is running things in Ottawa, have been gritting their teeth. While few will speak publically, a picture has emerged of an industry working hard, despite decreasing government support, to maintain capabilities through tactics that range from innovation, to diversification and a new emphasis on exports.

 

Funding restatement would help Ontario

That said some industry veterans prefer to focus on the positive. George MacDonald, a former vice-chief of defence staff at the Canadian Armed Forces and partner at CFN Consultants has seen similar swings many times during his multi-decade career. “There is hope that recovery to a balanced budget will result in reinstatement of funding in areas where it is needed most,” says MacDonald, echoing a widely expressed sentiment. “This would of course be positive for Ontario defence and security companies.”

 

Nicole Verkindt, founding president of the Southern Ontario Defence Association agrees, pointing to numerous bright spots. “Canada’s new procurement policy is promising,” says Verkindt. “If we are going to fund all of the programs promised in the Canada First Defence Strategy, it makes sense to do it right.”

 

Verkindt should know. In her day job, she is president of OMX, an online marketplace that tracks offsets, industrial trade benefits and provides data analytics that help businesses understand where jobs will go if projects such as the Joint Strike Fighter get the go-ahead.  “We recently compiled a spreadsheet at OMX to compare offset policies in various nations. The benefits that other countries are asking foreign primes for are unbelievable,” says Verkindt. “It only makes sense that Canada should do so too.”

 

IMT Defence: beefing up the ammo supply

Remo Assini, president of IMT Defence, which celebrated its 100th year in business this year, has also felt the pain of defence cuts, much of which have been in the maintenance, training and readiness areas. However the high explosive shell producer is weathering the 20 percent production drop well. “Its part of the business,” says the industry veteran. “Both the Tories and Liberals have gone through periods in which they increase and cut military spending. We are keeping busy now and hoping things will pick up later.”

 

IMT Defence’s immediate focus is on producing 120 mm Leopard tank shells, components for 40 mm high-velocity grenades that will be used on a gun mounted on the Tactical Armoured Patrol Vehicles and new 155 mm illumination rounds for the US Army. The company is also diversifying into other non-defence areas to keep production lines going.

 

Rockwell Collins: turning to innovation

Another promising development this year was the release of the federal government’s defence acquisition guide, which enables defence producers to better identify priority areas where they can contribute says Lee Obst, managing director of avionics, communications and networking systems provider Rockwell Collins, which has been focusing on innovation to boost competiveness, in its bid for a piece of programs such as the Fixed Wing Search and Rescue aircraft initiative.

 

“It’s a first draft but clearly a positive step,” says Obst, who has an excellent bird’s eye view of industry developments from his perch on the board of the Aerospace Industries Association of Canada, to which he was elected last year. “We are however hoping that future versions will include incremental improvements.” Suggestions include searchable databases and delineation between priority areas for the coming five years and aspirational longer-term goals.

 

Colt Canada struggles with red tape

While much of Ontario’s defence industry is burdened by “do nothing” government procurement policies, in other areas some companies would benefit if politicians would simply get out of the way. One example is Colt Canada, which makes the C-7 rifles, which almost all Canadian Armed Forces personnel have trained with or carried into battle. According to Francis Bleeker, a spokesperson, the country’s small arms center of excellence, has been hit on the order front too, particularly in the maintenance area.

 

However Colt, which also makes C-6s, C-8s, C-9s, 50 calibre machine guns and pistols, has been compensating by trying to build its export business but has been hampered by red tape. This includes Harper Government restrictions on exporting certain defence products to a range of peaceful, western democracies such as Austria, Ireland and Switzerland, the latter of which has defended its neutrality almost half a millennium. Colt Canada has been quietly working the back channels to get the regulations changed. But in the meantime has been making do building business in the Netherlands, Denmark and Norway.

 

L-3 Wescam: continuous improvement

According to a highly-placed defence sector insider, the net effect of cuts to operations and maintenance budgets for major land, sea and air fleets that were passed on to contractors in those areas has been in the 25 percent range. The fact that these were imposed well into the fiscal year has compounded the impact.

 

Manufacturers, whose kit was used in the Afghanistan and Iraq conflicts, have felt the drawdown particularly hard says Paul Jennison, vice-president (government sales and business development) at L-3 Wescam, which designs and manufactures industry-leading multi-spectral and multi-sensor electro-optic/infra-red imaging and targeting sensor systems, such as the widely regarded MX line. The company’s operations in Burlington and Don Mills, which house the bulk of its 900 Canadian employees, have seen a drop in business.

 

The answer at Wescam says Jennison is continuous improvement, notably through initiatives such as the recent development of MX variants that can be mounted on moving vehicles and used as gunner’s sights and panoramic sights. Building overseas clients is also key. “Our prospects for increased exports in a number of markets are continuing to evolve and, we believe, improve,” says Jennison, citing the Middle East and North Africa as potential targets.

 

Magellan: navigating procurement delays

One of the biggest disappointments stemming from the Harper Government’s stewardship of the country’s defence forces has been lack of follow-up on its Canada First Defence Strategy, which it announced with great fanfare several months before the 2008 election. Since then, as David Perry of the Conference of Defence Associations Institute notes, most major complex procurements are late. Worse, in real terms, far from boosting Canada’s defence forces, sector spending in real terms (when the effects of inflation have been removed) is actually less than before the strategy was announced six years ago. 

 

That gap is particularly evident in efforts to arrange next generation fighter capability, which have left a good chuck of the Ontario’s aerospace industry suppliers waiting for developments. One of these is Magellan Aerospace, which provides complex assemblies, systems, aerostructures and components to producers, and is a key lower tier supplier to the JSF program.

 

Ministerial level bungling of the fighter acquisition initiative, which included massive cost overruns, sloppy procurement procedures and interminable delays, have left Magellan, and many other suppliers pondering their fate. That said, as Laura Podaima, a Magellan spokesperson notes, the company’s Mississauga operations will be getting repair and overhaul work on the F404 engine which powers Canada’s CF-18 Hornet fleet.

 

ING Robotic Aviation: new ways to leverage UAVs

One defence company that has made among the deepest penetrations into civilian applications relative to its size is Unmanned Aerial Vehicles services provider ING Robotic Aviation, says Ian Glenn its president. The 40 person outfit, which recently moved production to Ottawa, but also does research and development in Sherbrooke Quebec and has a team in Fredericton, has been branching out into the oil & gas, mining, utilities, precision agriculture and forestry industries, among others.

 

Glenn remains surprisingly optimistic. “We are a small business, but we develop, and own, our technology,” says Glenn. “We are not just a front store for Americans or Europeans as many others are. The world continues to be unstable. So when the Canadian government needs our next generation fixed and rotor wing aircraft, we’ll be there.”

 

Shimco and FedDev: leveraging Ontario’s advantages

The defence industry has a huge stable of lower tier suppliers, many whom rise and fall with the industry. However lately, Shimco, which Peter Voss, its president acquired just over three years ago, has been going straight upwards. “We make specialized parts called shims, which can be used on fixed wing aircraft everywhere in the world today,” says Voss. “Ontario, with its skilled labour force, has some considerable advantages as a place to do business and we have been able to out-compete much larger players than us.”  It’s a comment echoed by many.

 

The recent roll-out of US president Barak Obama’s health care plan, which includes full-time employee coverage that Americans businesses are now required by law to pay for, is a case in point. It leaves companies in Canada, where medical costs are financed by the state, with a slight lead in this area. For its part FedDev Ontario, a government agency, which was founded several years ago to attract new business to the province, has been making considerable efforts to highlight these and other advantages (such as Canada’s lower marginal corporate tax rate) to potential investors.

 

GDLS: topping the largest export contract in Canadian history

The good news is that there are hopes that the defence sector in Southern Ontario, one of the regions hardest hit during the previous recession, is starting to pick up some steam. One big positive sign came earlier this year when General Dynamics Land Systems booked what spokesman Ken Yamashita calls the “largest advanced manufacturing export win in Canada’s history,” a multi-billion dollar deal to ship light armored vehicles and assorted supplies and services to Saudi Arabia.

 

Design and manufacturing will take place in London, Ontario, where the company will also coordinate a cross-Canada supply chain that of more than 500 firms. According to government sources, the 14-year contract is expected to create and sustain more than 3,000 jobs in Canada, with southern Ontario accounting for approximately 40 percent of the supply base. GDLS added on to the good news recently when it announced another export contract with Peru.

 

That said, whether good news like that at GDLS will spread to other Ontario defence contractors and the rest of the province’s devastated manufacturing base is an open question.

 

The Harper Government’s future may depend upon it.

 

peter@peterdiekmeyer.com

 

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