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Solving the global challenge

Canada’s aerospace and space industry is at a crossroads and David Emerson may have just the right solutions to send it down an even more prosperous path.

A more comprehensive commitment by government to research and development, education and training will help Canada maintain a leadership role on the world stage. B.C.’s Vector aerospace is one of the country’s leading MRO organizations. PHOTO: Vector Aerospace

Eighty per cent of Canada’s aerospace output is set for export, so how Canada’s aerospace manufacturers respond to emerging global pressures is going to play a significant role in determining whether the world’s fifth largest aerospace industry will stall or continue to punch above its weight.

“There has been a tendency to think we can continue without changing our approach,” Emerson, former chief executive of the Vancouver International Airport Authority, cabinet minister in both Paul Martin and Stephen Harper’s governments, and more recently, head of a federally commissioned review of the aerospace sector, told Wings. “With big shifts in the global economy, we are at risk of falling into a hole we can’t dig ourselves out of. If you stand still, you go backwards. You have to run faster to stay in the same place.”

Emerson released his two-volume report entitled, “Beyond the Horizon: Canada’s Interests and Future in Aerospace” in November and presented its findings in Ottawa Dec. 5-6 at the Aerospace Industries Association of Canada’s (AIAC) 2012 Canadian Aerospace Summit. Emerson’s solution for filling in the “hole” is a major overhaul of aerospace policies and programs, and the government is putting more bite into its promotion of Canadian aircraft manufacturing abroad. As the report states: “Presidents, prime ministers and senior officials around the world help open doors for their nations’ aerospace firms by highlighting those firms’ strengths and successes.”

“I hear from people and they say, you didn’t do this, and you didn’t do that,” Emerson told about 500 key industry leaders at the AIAC summit. “No, we didn’t do everything for everybody, but I think if you look at the recommendations in the report as a package that goes through the total sectors, an important recommendation is Canada step up and recognize that aerospace and space are national priority sectors – and we need to develop a national technology strategy that recognizes this.

“We have a technology strategy for health sciences, resources, and agriculture, for example, which tend to get preferred access with science and technology funding. And yet, the aerospace industry is the second-most research-intensive industry in Canada and has been for some time. Bombardier is at the top of the list as a company this year, Pratt & Whitney was last year . . . this is an industry that is absolutely research intensive and employs either directly or indirectly well over 100,000 people. The wages are well above the manufacturing average, it’s one of the most export-intensive industries in the global economy: we should be recognized as a Canadian priority sector.”

The promise of a strong future
In some respects, the aerospace sector is rolling along just fine. Aerospace is a $22-billion industry in Canada, directly employing approximately 66,000 (92,000 indirect jobs), largely highly skilled workers. Globally, Montreal’s Bombardier and CAE rank 16th and 47th respectively in the top 100 aerospace companies, and Pratt & Whitney Canada, a subsidiary of Connecticut-based United Technologies (ranked fifth), is the world’s largest supplier of turbine engines for business jets, regional aircraft and helicopters. The industry also boasts countless smaller, less noteworthy operations making a significant mark both in North America and on the global aerospace scene.

Winnipeg’s StandardAero is just one of Canada’s many successful global aerospace companies. PHOTO: STANDARD AERO

Montreal is home to the world’s third largest aerospace cluster after those in Toulouse, France and Seattle. But aerospace manufacturing in Canada has spread beyond Montreal and Toronto to growing aerospace clusters in Atlantic Canada, Winnipeg, Peterborough, B.C.’s Fraser Valley and more. Sidney, B.C.’s Viking Air, to cite just one example, is upgrading and extending the life of rugged de Havilland Canada aircraft such as the Beaver, the Otter and the Caribou in the absence of replacements. Companies such as Standard Aero, Cascade Aerospace, Flying Colours, Field Aviation, Marinvent, Xiphos and Provincial Aerospace are also making a substantial impact on the world stage.

But much more needs to be done to protect the future market success of the Canadian industry, especially if Canada is to continue to make its mark. Market conditions are creating a whole new playing field, one in which more government input is needed to help industry keep up. “It is a completely different industry now,” Emerson says. “The tectonic shifts in the global economy are reshaping markets, innovation and even where technology is coming from.”

Increasingly, new technologies will be coming out of emerging economies such as China, Russia, Mexico and others who are underpinned by heavy government investment and lower production costs to build airplanes or insert themselves into the higher end of the global supply chain.

And as more suppliers enter the field, the supply chain for airframers and engine suppliers is shrinking as original equipment manufacturers (OEMs) and their tier 1 integrators consolidate the supply base to reduce risk and cost. According to the aerospace review, for example, Brazil’s Embraer had 350 suppliers to build the 145 regional jet in 1996 and only 40 working on the E-Jet family of aircraft in 2004. Likewise, Bombardier has shaved the supply chain from 130 suppliers for the CRJ 700-1000 series of aircraft in 2001 to 30 for the CSeries.

Although airframes, aircraft, and parts distort the picture, components, avionics and electrical systems make up almost 50 per cent of every dollar spent on aerospace manufacturing in Canada. Maintaining a spot at the elite end of the global OEM and tier 1 supply chain against increased competition may be one of Canada’s biggest challenges both abroad and in its own backyard. As Emerson noted in the report: “A new aircraft takes years to develop and bring to market, and it can remain in service for decades. A company that is frozen out of a supply chain today can lose sales and opportunities for decades.”

Emerson expanded on this point at the AIAC conference. “When it comes to space and aerospace, there’s an allergy in Ottawa these days when we’re talking about long-term or talking about strategy,” he said. “But whether it’s aerospace or space, you’re talking about projects that are usually at least 10 years. And during those 10 years, you’re tying up some of the best minds in the country, you’re tying up capital, you’re putting money at risk in terms of R&D, and the enemy of success when product development is long like that is short-term thinking, gyrations in your decision making, and not having a stable eye on the horizon. Industry has got to know where the process is going. And this is an area that the government has got to take some responsibility in and measurable pride in maintaining the certainty and stability so the businesspeople who put their money on the line support the industry and help grow the Canadian economy.”

It’s clear that the current government has done less than it could have, and much less than foreign governments including the U.S. and European countries, have in promoting its aerospace interests abroad. Some of that is not Canada’s fault. A telephone call from Ottawa does not carry the same weight as a call from Washington, Berlin or London. There is also a sense that Stephen Harper’s government is hesitant to promote Canadian aerospace because it does not want to be seen in public as carrying Bombardier’s water.

Canada’s Economic Development Corporation (EDC) is an international expert in the murky world of aerospace financing while turning a profit. There was a time when EDC financing could trump government intervention. That, too, is part of the changing landscape, Emerson notes. “We are now in a world where governments are dealing with government. Especially where democracy is not the law [China]. Here, if you are not dealing government to government in a commercial way then you are not going to be particularly successful.”

Competing in the new environment
In 2008, Bombardier, pioneer of the regional jet, green-lighted the CSeries family of airliners, aimed at filling the 110 to 149-seat sector. For the first time, the world’s third largest builder of civil aircraft was taking direct aim at Airbus and Boeing at the smaller end of their bread and butter product line, the A320 and 737. Since then, the big two have played cat and mouse with re-engined versions of their legacy designs against Bombardier’s clean sheet.

The Canadian aerospace industry generates $22 billion in revenue annually. Montreal SIM manufacturer CAE has emerged as a major player on the international stage. Photo: CAE

Most analysts agree that Bombardier is launching a superb airliner, yet the airframer, unlike the business jet division that just landed a deeply discounted $7.8-billion order for Global aircraft from Swiss-based VistaJet, does not know how to market the aircraft. “While this wasn’t the CSeries order that we believed would be most impactful,” Walter Spracklin, an analyst with RBC Dominion Securities wrote in a note to clients, “we believe this order will be well received.”

So, has the government’s refusal to act as a salesman for Canada’s aircraft builders been partially responsible for soft CSeries sales? Emerson refuses to be drawn into a single program, but adds that, “when you look at other countries, there tends to be visible support to sell their products.”

He is, however, bullish on collaboration agreements similar to the one Bombardier inked with China’s COMAC, while pointing to the need to take such agreements further. The agreement was signed last March and could lead to a common cockpit design between the CSeries and COMAC’s larger C919 single-aisle aircraft, and a breakthrough order for the Bombardier jet. 

“If you look at future demand for aircraft and the economies that are going to dominate that demand, there is no doubt in my mind that if you are not prepared to put a physical presence on the ground such as joint ventures and production, you are not going to be particularly successful,” Emerson told Wings, adding that governments are also going to have to step in to protect Canadian companies and technology transfers in case deals go sideways. Bombardier manufactures aircraft in Northern Ireland, Mexico, Morocco and the U.S., and has recently denied reports it is considering opening a second Q400 turboprop production line in Russia.

On the aerospace side, Emerson has delivered 17 recommendations he describes as “revenue neutral” and responds in the report to obvious emerging trends (some are listed in “Establishing a working blueprint.” The Vancouver-based Fraser Institute disagrees.

Mark Milke, an institute fellow, describes the report as an “apologia for subsidies,” in an opinion piece for the National Post.

Said Emerson at the AIAC conference: “I have already been trashed by the Frasier Institute and I’m not sure if that’s a badge of honour or something I should be in any way worried about. I think our report was very balanced, we looked at what other countries are doing in the world, we did get around to all of the main players in the aerospace business . . .”

Emerson also said, “the good old days of multi-lateral rules, trade and investment and a nice level playing field that Canada helped build through the WTO and the UN and elsewhere, those days are sliding away on us. Parts of the tectonic shifts in globalization have created fissures between developing and developed countries, whether it’s in trade or in the UN or between democratic countries and non-democratic countries. We have all kinds of messy developments that are emerging in the global economy. And those developments will manifest themselves on the competitive playing field. They will manifest themselves if you say, “If you want to sell planes in the country which is where the market is going forward, you’re going to have to put a plant in our country, and you’re going to have to start loosening up on intellectual property. Those situations are coming and the competition is going to be severe.”

Is it time to ante up?
For his part, Emerson is as blunt on the subject of subsidy and whether the government is going to have to raise the ante to continue to be a key player in global aerospace and maintain over 66,000 highly skilled jobs. “You hear complaints all the time, but if you look at what governments are spending on their aerospace industries Canada is not at the top of the pack. We are somewhere in the middle, which is surprising given the size of our industry,” he said.

Pratt & Whitney Canada, a subsidiary of Connecticut-based United Technologies, is the world’s largest supplier of turbine engines for business jets, regional aircraft and helicopters. Photo: Pratt & Whitney Canada

That, he insists, is not a signal to open the taps. “There is a place for an intelligent light touch where government can be helpful. We need to find that balance where you don’t need to put taxpayer money where private money will go.”

Minister of Industry Christian Paradis, who also spoke at the conference, was quick to endorse the report and said he would work to make the recommendations a key priority going forward. He echoed AIAC president/CEO Jim Quick’s assertion that the industry must come together and use its strengths and talents to create an environment that contributes stronger economic benefits to Canada and better way of life.

“Our government understands the challenges you face – the role you play, the jobs you create, the contribution you make, the future you are building . . . and we intend to be an active partner,” Paradis said. “We are committed to building on our partnership with AIAC and the entire sector.

That’s why our government launched the review in the first place. That’s why I am working with my colleagues on solutions. This report is not going to sit on the shelf collecting dust – I will continue to champion this industry in our country and around the world.

It’s a thoughtful, focused and well-organized approach that ensures Canada continues to thrive in both the aerospace and space industries for years to come. Taking action on these recommendations is precisely what’s needed in the months and years ahead for the continued success of the Canadian aerospace and space markets.

Canadian aerospace by the numbers
Number of aerospace companies in Canada – 700
Amount of revenue aerospace generates annually – $22 billion
Amount committed each year to research and development – $1.6  billion
Direct number of employees in the aerospace industry – 66,000
Spinoff jobs created by the aerospace and space industries – 92,000

– with files from Matt Nicholls