Number five worldwide and climbing: can Canada keep up the momentum?
When the count is complete, Canada expects to have ended 1998 with the world's fifth largest aerospace industry, ahead of Japan in sales terms - one rung higher than in 1997 and one step closer to its goal of overtaking Germany and reaching fourth place in 2000.
That goal looks achievable, given the industry's order backlog. But with Bombardier placing more work outside Canada, Boeing cutting commercial aircraft production, and the bonus of the weak Canadian dollar uncertain to last, the industry faces challenges sustaining its growth and maintaining its world ranking.
While the up cycle of recent years has highlighted the Canadian industry's strengths - its heavy emphasis on civil work and export sales, and its quality and reliability as a subcontractor - the coming-down cycle could expose its weaknesses: gaps in capability at the supplier level and a lack of resources for risk sharing.
For the next two years, the picture looks good. The industry beat its 1998 sales projection of C$15.3 billion, and is on track to meet or exceed its targets of C$16.4 billion this year and C$18 billion in 2000. "A rough calculation shows we exceeded our 1998 forecast," says Peter Smith, president of the Aerospace Industries Association of Canada (AIAC).
Four companies accounted for more than half of last year's sales, reinforcing the perception that the "primes" - Bombardier, Pratt & Whitney Canada, Bell Helicopter Textron Canada and CAE Electronics - are the Canadian aerospace industry. "The primes are the face of the industry," acknowledges Ron Watkins, director general of the aerospace and defence branch at Industry Canada. "Less well known are the second and third tier suppliers, which are growing in sophistication."
The primes are important, because they are all world leaders in their fields: Bombardier in business and regional aircraft; P&WC in small turbine engines; Bell in commercial helicopters; and CAE in simulators. "A lot is driven off the success of Bombardier and Pratt & Whitney," says Watkins. "We are seeing strong growth in medium and smaller companies, proving that they are competitive and capable. There is a lot more strength than just the primes.
"The composition of Canada's industry is different to others," he says. "Half of it is in Quebec, a third of it in Ontario and the rest is distributed. Sales are 80% civilian and 20% defence-related. Exports are about 80% of sales. It is an international competitive industry that is growing at a rapid clip."
Airframes accounted for more than half of all sales last year - for the first time, according to the AIAC - boosted by Bombardier's continued growth. Propulsion was the next largest, thanks to P&WC, at about a quarter of the total sales. Avionics - the fastest-growing segment - space and defence sales made up the rest.
Canada would like more primes - and has succeeded in attracting new general aviation manufacturer Diamond Aircraft to its shores - but the focus for now is on increasing the capabilities of the supplier base. Late last year, the AIAC and Industry Canada launched a supplier base study, to identify the issues facing the sector, and to determine the government policies and Association actions required to meet the challenges facing suppliers.
"Over the last decade, there has been a tremendous change in the supplier base," says Smith. "There has been a purge in the number of suppliers interfacing with the primes, forcing them to form consortia to compete. And, with globalisation, the primes are not looking domestically for suppliers, but internationally, to reduce costs and leverage sales."
Sales to Canadian primes are now eclipsed by those to Boeing. One reason is Boeing's outsourcing effort over the last two years, which has been a windfall for Canada's industry. But this has concealed an underlying decline in the domestic content in Canadian-produced aircraft and engines, as their manufacturers have gone offshore to find risk-sharing partners.
The supplier base study, being conducted by PricewaterhouseCoopers and scheduled to be completed by the end of June, is intended to build on government-industry efforts already under way to strengthen the sector. Among them are government financial support for product development; AIAC-brokered efforts to facilitate collaborative technology demonstrations; and joint promotion of the industry's capabilities, such as last year's trade mission to Airbus Industrie.
Watkins led the 22-company mission, which was intended to introduce Canadian suppliers to Airbus' partner companies and principal suppliers, in a bid to develop business relationships similar to those in place with Boeing. "We are not taking a 'Canada Inc' approach because we do not plan to buy a stake in Airbus," says Watkins. "Instead we want to encourage partnerships at the supplier level."
In the absence of a willingness by the government or Bombardier to take a stake in Airbus, the industry's approach to winning work is to encourage direct links between second- and third-tier suppliers and their counterparts in Europe.
In making its approach to Airbus' suppliers, the industry is emphasising the reputation for quality, reliability and on-time delivery that has won it substantial business from Boeing. Additionally, it is pushing Canada's potential as a platform from which European suppliers can access the US market. "Sixty percent of our export are to the USA, which makes us a good platform for co-production," says Smith.
He cites the success of Magellan Aerospace, which recently won its first Airbus subcontract work to add to its already substantial aerostructures business with Boeing.
Watkins says there are several advantages in working with Canadian companies: "the favourable business environment; the availability of skilled people; the cost competitiveness of the industry; and the easy access to the USmarket. Canada is a very competitive environment for knowledge-based industries, and a very good platform from which to do business in NAFTA [the North American free trade area which includes Canada and Mexico]."
The major obstacle faced in attracting Airbus and other business - including that from Bombardier - is the need for risk-sharing investment. Canadian firms are generally small by international standards, and have difficulty accessing the financing required to participate in programmes such as the A3XX.
The government's major vehicle for supporting the industry is the Technology Partnerships Canada (TPC) programme. The TPC provides repayable loans for product development, and enables companies to participate in risk-sharing programmes, but the funds available have been criticised by industry as inadequate.
Under pressure from industry, the TPC was launched in 1996 to fill the gap created by the government's termination of the long-running Defence Industry Productivity Programme (DIPP). But whereas DIPP peaked at around C$300 million a year in aerospace-related loans, only two-thirds of the C$250 million available annually from TPC goes to aerospace. The budget will be increased to C$300 million this year, with more money going to smaller firms, but this is less than the C$150 million increase sought by industry.
Levelling the playing field
P&WC has been one of the strongest critics of the underfunding of the TPC. "Canada's industry is different to most," argues chairman David Caplan. "The USA has a tremendous base of military R&D [research and development] spending and procurement, and Europe is essentially the same. Canada has neither. The Canadian military traditionally buys off the shelf, and most government funds go into maintenance and support."
The TPC is intended to "level the playing field" by providing government support for industry in the absence of military R&D funding. "There is no single engine we compete against, US or European, that is without government input," Caplan says, arguing that funding for technology, development and even initial tooling is provided to competitors under military programmes. "Canada has to have a different formula," he says.
Caplan believes that the underfunding of the TPC has resulted in a reduction in Canadian content in the industry's products. "As sales have gone up, the Canadian value-added percentage has gone down," he warns. While P&WC's sales were forecast to increase 18% last year, its purchases from Canadian suppliers were expected to increase only 6%. "Like Bombardier, we are using more partnerships to launch programmes, which impacts the value added in Canada," he says.
Watkins says that the TPC "...is fundamentally designed to be a risk-sharing instrument, affording the government some upside opportunity when it takes the risk." Investments are made anticipating full repayment in the form of sales-based royalties, he says, but accepting the risk that sales may not reach the level at which repayments begin.
The World Trade Organisation recently ruled that TPC investments totalling C$141 million in Bombardier's Canadair Regional Jet Series 700 and de Havilland Dash 8Q-400 regional aircraft programmes constituted illegal export subsidies. No problem was found with the overall programme, the government says, and the TPC is to continue in its present form, possibly with minor changes to eliminate any direct linkage with exports.
One criticism levelled at the TPC is its lack of support for smaller aerospace firms. More than two thirds of the funds committed so far have gone to Bombardier, CAE (C$32 million) and P&WC (C$147 million). While more money is to be made available for smaller companies, the AIAC has teamed with Canada's National Research Council (NRC) to promote collaborative R&D programmes to help small firms pool their resources.
The Programme Office for Collaborative Technology Development, established at the NRC's Institute for Aerospace Research in January, is described as "a public/private partnership created to serve as a centre of expertise for promoting and structuring aerospace research consortia".
The programme office's goal will be to turn a technology roadmap developed by the industry and government into collaborative demonstration projects. These and other candidates will be assessed by the programme office, which will identify those with high potential, recruit project partners and provide assistance in securing funding.
"This is a significant step forward," says Ken Laver, president of landing gear maker Messier-Dowty. "Canada's industry was lagging in the implementation of collaborative approaches to technology development. We lacked a suitable platform as a catalyst." Growing the breadth and depth of capability of Canada's second- and third-tier suppliers is a priority for both government and industry. "I would like to see product areas and service areas fill out," says Watkins.
"I would also like to see smaller companies move up the value chain," he says. "The industry is being driven from the top down. Primes are asking for more subsystem integration, and companies have to learn how to operate in that environment. The Canadian industry has had to step up to the bar to supply Bombardier," Watkins says. "Bombardier is a tough customer, but there is no doubt it has been good for the industry."
Source: Flight International