Canadian Defence Review

April 7, 2015

Atlantic Canada aerospace and defence report 2015
A cheaper loony and increasing signs of life in NSPS are firing sector momentum.

Colin Stephenson, executive director at the DEFSEC Atlantic, which will be held this September in Halifax, doesn’t track the Canada-US exchange rate daily. But these days he keeps a close eye on it. During the past four years, the loonie, which has plunged nearly 25% from its recent high, has vastly improved the region’s defence industry’s competitiveness. It could also help increase traffic at the event he heads.

“Atlantic Canada is far more than just a supply chain for the production of National Shipbuilding Procurement Strategy vessels,” says Stephenson, in a tip of the hat to Irving Shipbuilding’s dominant regional presence. “We also host a wealth of local SMEs whose products are now substantially cheaper in US dollar terms.”

This increasingly positive export outlook, couldn’t have come at a better time for Atlantic Canada. The region, which is heavily reliant on public spending, continues to register subpar economic growth and has been hit hard by Harper Government defence procurement mismanagement, which has left many local companies without contracts that they had been expecting. However there too, news has been promising. The Tories tend to time defence procurement announcements with upcoming elections; with one scheduled for this fall, hope in the sector is running high.

That’s good news for DEFSEC Atlantic, the region’s largest aerospace and defence show, which, like many industry events in this tight budget era, has been battling to increase attendance. Last year the exposition drew close to 1,100 participants from 300 companies. Recent developments could spur growth. “We are already projecting at least between 40-50 companies in our US pavilion,” says Stephenson. “But we are also considering offering other services to potential exporters such as sessions on how to do business with the US government.”

An industry in transition
Seasoned hands, such as Glenn Copeland, chairman of the Atlantic Alliance of Aerospace and Defence Associations (AAADA) suggest industry momentum is picking up. One example: news that Irving Shipbuilding was confirmed as the prime contractor, for the $25 billion 15-ship Canadian Surface Combattant program. Irving has long been slated to build the combat ships, planned as part of Canada’s National Shipbuilding Procurement Strategy. However the new assignment, which breaths some life into a long stagnant initiative, means that Irving will also hire the sub-contractors. 

“In Atlantic Canada shipbuilding remains the core of future innovation,” says Copeland, whose day job is as a program manager at Lockheed Martin Canada. The AAADA, attuned to the improving export outlook, recently held a variety of seminars across the region dealing in topics such as Canadian and US export controls and the controlled goods program.

Irving Shipbuilding: pushing on with AOPS and HCM/FELEX
Recent news related to its increasing Canadian Surface Combattant contribution further cements Irving Shipbuilding’s role as a dominant regional defence contractor. According to Mary Keith, a company spokesperson, Irving, which has its finger in a slew of naval projects, has been making progress on almost all fronts. These include the Arctic Offshore Patrol Ships, - arguably one of the country’s most important defence initiatives – for which steel cutting for the first vessel, will begin in September. That and other NSPS work will require a massive $340 million modernization of the company’s Halifax Shipyards, which is currently underway.

Irving Shipbuilding is also responsible for upgrading seven of the ships in the Halifax Class Modernization/Frigate Equipment Life Extension (HCM/FELEX) Program. These include the HMCS Ville De Quebec, which is currently being worked on in the company’s Halifax Shipyards, and the HMCS Toronto, which is next in line sometime this summer.

These three main projects (Arctic Offshore Patrol Ships, Halifax Class Modernization and Canadian Surface Combattant) are expected to push Irving Shipbuilding’s workforce from 1,200 to more than 2,000 employees by the year 2020. That’s on top of the huge spinoff benefits which will accrue across the region.

Ultra Electronics: growing underwater technology
Irving Shipbuilding’s strong regional presence encompasses a huge network of regional suppliers. These include Ultra Electronics Maritime Systems Inc., which bills itself as a world leader in the development and manufacture of undersea surveillance, magneto inductive technology and infrastructure optimization and protection solutions, whose 140 engineering and production personnel are heavily reliant on Royal Canadian Navy spending.

Ultra Electronics got good news when it was recently awarded a Strategic Aerospace and Defence Initiative (SADI) grant, which Ken Walker, a company spokesperson, says it will use  to conduct research and development work related to a next generation of towed military sonar. Ultra Electronics also recently partnered with General Dynamics Canada, to bid on the Halifax class frigates’ underwater suite upgrades.

These wins are part of a broader regional sector trend says Walker who notes that Eastern Canada’s focus on underwater technology, has become more visible following the establishment in Halifax, of the Institute for Oceanographic Research and General Dynamics Canada’s new Edge Innovation Center. According to Chris Pogue, vice-president (business development and strategy) at General Dynamics Canada, the new center, housed at the company’s 40 person Dartmouth facility, will focus on undersea warfare solutions, which are expected to see increased demand as NSPS gets into gear.

Bluedrop Training and Simulation: ITB shift should help
One trend that shows signs of helping Atlantic Canada producers is the federal government’s new requirement that vendors deliver enhanced value propositions. “The shift from industrial regional benefits to industrial and technological benefits (ITBs) is highly promising,” says Derrick Rowe, chairman of St-John’s Newfoundland and Labrador-based Bluedrop Training and Simulation. “OEMs and Tier 1 contractors are now showing far more interest in technology transfers within global supply chains. So there is a lot of potential.”

Rowe should know. Bluedrop provides specialized virtual reality simulation training, advanced equipment, and custom courseware development to all three branches of the Canadian Armed Forces. This gives Rowe a fabulous perch through which to view industry developments.

Current mandates include work on solutions for the Sikorsky Marine Helicopters, C-130 transport aircraft, the Canadian Flight Training School, Arctic Offshore Patrol Ships, the Frigate Life Extension Program and many others. “If the Department of National Defence is involved in a program, we want to be too,” says Rowe with a laugh.

One major challenge facing almost all Atlantic Canada aerospace and defence producers, that Bluedrop has managed to overcome is the lack of scale. Location in Eastern Canada, far away from the major financial and political decision centers in Toronto and Ottawa, gives local producers less access to contracts, opportunities and talent. As such many Atlantic Canada aerospace and defence contractors tend to be smaller than their major competitors.

Rowe responded by helping engineer the acquisition of Atlantis Systems, a regional competitor. As a result, Bluedrop’s training and simulation arm, which employs about 100 professionals and accounts for 75% of the company’s revenues, is able to give far better service to potential clients. “I have been involved in a lot of mergers and this one went the smoothest I’ve seen,” said Rowe. “Many of the people involved already knew each other which made it easier. In addition, where overlaps existed we were able to keep best of breed. This substantially improved our ability to bid on new contracts and thus on our competitive position going forward.”

Stelia North America: creating scale to compete internationally
Mergers to create new efficiencies have also been occurring on the international stage. For example Sogerma and Aerolia recently combined to create the world’s third largest aero-structure player. Here in Canada this led to Composites Atlantic (which comprises the bulk of their Canadian operations) changing its name to Stelia Aerospace North America – Composite manufacturing.

According to Claude Baril, Stelia’s general manager, the move has been important, because the company, a major parts provider to Canada’s fighter efforts, has been forced to boost civilian work. Stelia like all Canadian JSF Industry Group members, who have been lobbying hard for development of Lockheed Martin’s F-35 Lighting II next generation jet fighter, have been among the biggest losers from Harper Government inaction on the defence front.

“It’s been dead,” says Claude Baril, general manager of Stelia North America. “You can’t wait forever to start these types of programs, because they take a long time to get rolling. The entire industry is losing opportunities.” Officially, JSF, which at one time, was expected to be the largest procurement in Canadian military history, is under review. Unofficially, Conservative party strategists are assessing whether they would get more votes by announcing a program re-boot (and sorely needed new jobs for Atlantic Canada) just before they head to the polls, or whether they will gain more by sweeping the issue under the rug until after the election.

Stelia in the meantime is building its civilian business, which now comprises 85% to 90% of operations. That said the company, which boosted its employee head count to 450 last year, recently got good news on the defence front too, in the form of work from Lockheed Martin to make composite parts for the C-130 transports.

IMP Aerospace: a massive Atlantic Canada presence
Atlantic Canada’s largest defence firm, IMP Aerospace and Defence, which is one of the few domestically-owned major players, has also been keeping busy, says Carl Kumpic, its vice-president (international marketing). The company employs 1,500 staff, split among five operating units located in eastern Canada, and many others at recently-acquired British Columbia-based Cascade Aerospace. 

These include the Canadian SAR Helicopter Operating Unit, known as the Cormorant Support Center, located Halifax, where activity has been stepping up, as personnel define a mid-life upgrade program for the rotary winged aircraft. IMP has also been working hard on a program to extend the life of 14 CP-140 maritime patrol aircraft. Company officials are also angling to get work on the proposed new fixed wing search and rescue aircraft program, NSPS and the future pilot training initiative.

CarteNav: knows where it’s going
One company with exceptional knowledge regarding where things are, is Halifax-based situational awareness solutions provider CarteNav Solutions, where Paul Evans took on the CEO role in December of last year. The timing could not have been better. According to Scott Richardson, vice-president (sales & service), CarteNav is coming off its best year ever.

“We have had major program wins including upgrade work on the CP-140 Auroras, Ingress have developed new business in international markets such as Mexico,” says Richardson. “Customers like the fact that we are located in Atlantic Canada, because it kills two birds with one stone. They get top products and many can use the procurements to also fill offset and IRB requirements.”

Miramichi-based Cormer Defence for its part continues to reel from the Harper Government’s cancellation of the Close Combat Vehicle program, and a decision to do certain tactical armoured patrol vehicle work in Kentucky. However Leo Sousa, Cormer Defence’s president isn’t just sitting around. The company, which is planning to do drive train work related to DND’s Light Armored Vehicle upgrades, is looking for employees with specific skill sets, such as technicians engineers and program managers, to help complete the mandate. That said, Sousa says that one trend that should be helping defence manufacturers, lower oil prices, hasn’t panned out yet as many had hoped for, as carriers are not yet passing along savings in the form of lower shipping rates.

The main threat to Atlantic Canada producers is that many of the trends that are boosting their collective moods right now are cyclical in nature. A cheaper currency, falling oil prices (that will eventually translate into transport bills) and an upcoming federal election, (which will have politicians being nice for at least a while) won’t last forever. That means they will need to act fast, while the momentum is in their favour.

The degree to which Atlantic Canadian aerospace and defence players can leverage current positive trends, will affect their collective performance for years to come.


*****
Photo caption: Howie Nippard of General Dynamics Canada’s Dartmouth facility, home to its new Edge Innovation Center, demonstrates a sonar upgrade. 
peter@peterdiekmeyer.com

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