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Canadian Defence Review

January 27, 2016

Alberta aerospace and defence report 2015
Questions abound regarding the effect Alberta’s troubled economy will have on its aerospace and defence sector. New federal and provincial governments have so far proved unable to provide direction. A cheaper dollar will help. But its effects will take time to filter through.

Alberta’s future is so tied to energy that any business article about the province inevitably touches on the effects of current low oil and gas prices – even one dealing with aerospace and defence. The resulting economic hiccups, which range from job losses, to a weakening housing market and consumer demand, have totally absorbed the new Trudeau and Notley governments’ focus.

Yet these high value-added sectors could provide part of the solution to the province’s economic woes. By all accounts Alberta’s 170 or so aerospace and defence companies, which employ nearly 6,000 skilled workers, and account of $1.3 billion in annual revenues, 40% of which is exported, are among the most important drivers of innovation in the province.

“Alberta has geographic advantages that make it an ideal locale for defence related activities, particularly in land and air training, but also in capabilities development and production,” said Bruce Gilkes, chairman of the Western Canadian Defence Industries Association, which will be hosting the WestDef 2016 regional conference in Calgary in early July. “So it was only natural that a strong mix of businesses should spring up around them.”

General Dynamics Canada and GDLS: a solid base
These companies, which range from large multinational players such as Raytheon, Bell Helicopter and Harris, to SME innovators such as NovAtel, Sprung and Pelican Products are in many ways poised to pick up the slack left behind by all those abandoned oil rigs. GD Canada’s Alberta subsidiary is a prime example. The company, which recently rebranded itself as General Dynamics Mission Systems - Canada offers numerous supply chain opportunities to multi-national OEMs who are looking for ways to better leverage their industrial and technical benefits obligations.

Like most Canadian defence companies, those with Alberta operations tend to have global outlooks. One example is General Dynamics Mission Systems Canada’s sister company General Dynamics Land Systems, whose 75 Alberta-based employees continue to do work on the LAV Upgrade and LAV Reconnaissance Surveillance Suite programs at its 153,000 square foot Edmonton facility. During the past year, the company has been trying to leverage the facility’s ballistic welding, vehicle assembly, testing, repair and other manufacturing capabilities, to generate new work outside Canada.

For example GDLS is trying to develop synergies with the complementary Australian LAND 400 Phase 2 Combat Reconnaissance Vehicle (CRV) program, for which it also recently responded to a Request for Tender. According to Doug Wilson-Hodge, a spokesperson for GDLS, the company is also encouraged by prospects stemming from the Canadian Army’s review of capital equipment programs and priorities.

UVS cluster: Meggitt, NovAtel, CDL Systems
Alberta’s government, educational and armed forces backers also continue to push the province’s potential as an Unmanned Vehicle Systems hub. Much of this success stems from its vast land and air spaces which facilitate training efforts at numerous military bases, which host three instrumented weapons ranges.

Private sector capabilities in this area, led by players such as Meggitt Target Systems, include command & control systems, wireless communications, avionics, navigation systems, global positioning systems, remote sensing, nanotechnology and manufacturing. According to Vincent Malley, a spokesman, international interest in the company’s live-fire training and weapons performance measurement capabilities, continues to grow, notably in Asia.

Meggitt has also been busy here in Canada. During the past year the company completed a major expansion of its Medicine Hat facility and has been continuously adding to staff. Last June Meggitt partnered with Lockheed Martin Canada CDL Systems, to host a joint UVS demonstration in Halifax for Royal Canadian Navy brass and other assorted industry stakeholders. The two companies demonstrated a range of sea, air and submersible unmanned assets, in a bid to drum up new business for this growing technology cluster.

“The presence of a number of high-tech defence companies in Calgary has created a defence sector technical hub centered (there),” says Lori Winkler, a spokesperson at NovAtel, which specializes in the development, manufacturing and distribution of NAVWAR products and services, and is key player in that cluster.

During the past year the GPS Anti-Jam Technology and electronic protection, support and attack provider, which employs 400 professionals in Alberta, has broadened penetration of its GAJT technology, which protects GPS positioning information, in a growing number of UVS, marine, land and weapons arenas.

ConvergX: linking defence and energy
According to Kim Van Vliet, CEO of WAVV Business Development, an interesting innovation that has emerged from this unique juncture in Alberta’s economic development has been the growing recognition of the mutual interests of the province’s defence and energy sectors. “Market forces are compelling the energy industry to find new efficiencies and cost cutting measures and new sources of income,” says Van Vliet, who is also the organizer of ConvergX, a new trade show that brings together the two sectors.

“Projected defence sector spending, will force providers to seek partnerships to add value to the Canadian economy,” says Van Vliet. “The key is that Canadian jobs don’t necessarily have to be tied to the defence companies’ projects. This opens the door to cross-sectoral diversification and/or licencing opportunities.” The hope is that defence stakeholders could learn from the energy industry as well, particularly with regards to technology related to activities in severe weather conditions in which ruggedization, traceability and survivability are crucial.

Lockheed Martin Canada CDL Systems: hedging through dual use
A good example of a provider that services both the oil and gas and defence industries is Lockheed Martin, whose Canadian subsidiaries, are navigating continued delays in the country’s fighter jet procurement plans. One example is the Lockheed Martin Canada CDL Systems division, which produces software that creates 3D image representations of oil & gas and power installations from data captured by low altitude aerial surveillance. Indeed Gary Biergman, a regional manager in charge of technology investments at the division, which sells to oil and gas and defence companies was, at press time, scheduled to attend ConvergX, provides a good signal of the conference’s potential.

To adapt to the shifting environment Calgary-based Lockheed Martin Canada CDL Systems’ 65 highly skilled engineers have been broadening the analytics tools and applications they develop so they can target civilian as well as defence markets. Indeed Lockheed Martin Canada CDL Systems’ capabilities provide a perfect example of the dual (military and civilian) benefits that Alberta’s entire Unmanned Vehicle Systems sector provide.

Pelican makes the case for Alberta
Pelican Products ULC, an Edmonton-based producer of high-performance, rugged cases, also generates significant business in the civilian life science, aerospace and industrial markets, a trend that Ed Meyer, its president, says is likely to grow. Pelican has a particularly high profile amidst Canada’s Armed Forces, as the individual campaign boxes it produces, are widely used by military personnel for general purpose storage during transport, and are designed to be able to fit the CAF C7-A2 rifle, which almost all have trained with. “There is a definite shift in requirements,” says Meyer. “We are (increasingly) being engaged to extend the life of clients’ fleets and equipment to bring down costs.”

Pelican markets its products through a cross country chain of distributors, and its Pelican-Hardigg Advanced facility, which produces custom made cases, is located in St. Jean-Sur-Richelieu Quebec. The company’s decision to locate and keep its head office in Alberta, when it could have been located pretty much anywhere, has been cited as a tangible sign of the province’s continued stature in the defence sector.

WestDef: a bellwether of industry activity
One highly connected sector stakeholder who has a particularly good finger on the industry’s pulse is Denean Tomlin, executive director of both WCDIA and WestDef 2016. Tomlin has made adjustments to the timing of the event, in part to boost attendance, which lagged last year, due to conflicts with both federal and provincial election cycles. WestDef 2016 will now be held the week before the Calgary Stampede. The change was made in part to ease questions that many potential government WestDef-goers were facing, about their true motives in attending a conference scheduled so close to the highly popular stampede.

WestDef 2016 should be particularly attractive to US defence professionals says Tomlin, due to the falling Canadian dollar, which has vastly increased the relative productivity of the province’s manufacturers compared to that of their US counterparts. “Currency changes take far longer to filter through into the defence industry than they do to other parts of the economy, due to the long lead times and production cycles,” notes Tomlin. “So we haven’t seen much effect from the cheaper dollar just yet, particularly among Tier 1 suppliers. However as the currency advantage persists, American buyers will increasingly start looking north. We believe that WestDef 2016 will be great place for them to start doing that.”

Tomlin, an eternal optimist has been seeing some small potential advantages from the lower oil prices. “It’s cheaper to fly, float and drive things, when fuel costs are low,” says Tomlin. “Defence contractors are thus hoping that some of the funds Canadian Armed Forces will save on Army, Air Force and Naval operations this year will be rechanneled into procurement.”

C4i: expanding and hiring
Bruce Gilkes, WCDIA’s chairman, also sees rays of light shining through the current tough times. Gilkes’ day job is as president of C4i Training and Technology, a 35-person business, with a large US customer base. The emergency and disaster management simulation technology provider has been seeing direct benefits from the currency shift, which has seen the loonie fall from USD $0.94 in July of 2014, to USD $0.79 twelve months ago and USD $0.70 range at press time. “It makes our products less expensive in US dollar terms,” says Gilkes. “So we have had great success in numerous export markets, particularly in Asia.”

C4i Training and Technology’s leanness, has also enabled it to respond quickly to shifts in Alberta’s economy. For example the company took advantage of falling rental prices, by doubling the size of its offices. It also took leveraged the toughening employment situation taking on new, highly skilled staff, which had been hard to find when times were good.

DPS: more clarity expected during coming months
The big questions during coming months though will inevitably turn around developments in Ottawa, but also Edmonton, which has seen three changes at the Premiership level during the past two years. Key there will be the stance that the Rachel Notley led New Democratic Party Government takes on defence matters. Another big question relates to what progress, if any, is being make within the Department of National Defence and Public Works and Government Services Canada procurement establishments.

As Terry Manion, vice-president and general manager of Raytheon Canada Limited Support Services Division notes, formation of a new government has slowed the final rollout of the new Defence Procurement Strategy, though clarity is expected during the coming 12 months. “Initial indications are the strong requirements for Canadian industrial participation in defence procurements will provide increased business for local operations,” notes Manion. If he is right that would be good news for Raytheon, which recently began offering enhanced full-lifecycle C4ISR systems and capabilities, here in Canada.

Not everyone in the industry is as optimistic though. As David Perry, an analyst with the Canadian Global Affairs Institute noted in the 2015 Status on Major Defence Equipment Procurement, last year’s federal election froze up defence product acquisition, putting a halt to “important progress being made in a slow and bureaucratically complex procurement process.” The hope among Alberta’s aerospace and defence stakeholders, is that that sclerosis will turn into action.

With energy prices showing few signs of bouncing back in the near future the sooner that happens, the better.

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Highlight this quote:
“It’s cheaper to fly, float and drive things, when fuel costs are low. Contractors are hoping that funds Canadian Armed Forces save on operations will be rechanneled into procurement.”
Denean Tomlin, executive director WCDIA

Peter (at) peterdiekmeyer (dot) com

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peter@peterdiekmeyer.com

Peter Diekmeyer Communications Inc.