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Canadian Defence Review

July 7th, 2016

Atlantic Canada aerospace and defence report 2016
Acceleration of the Canadian Surface Combatant program and government commitments to the Royal Canadian Navy, are breathing new life into the region’s defence industry.

Halifax is Atlantic Canada’s defence hub. The Royal Canadian Navy’s east coast fleet is based there, as is Halifax Shipyard, the country’s most important combat vessel production facility. Close to 10,000 defence personnel work in the city, according to the Greater Halifax Partnership, and Nova Scotia alone houses 40% of the Department of National Defence’s assets. Recent developments suggest that those numbers could grow.

Minister Judy Foote’s recent announcement that Public Services and Procurement Canada will accelerate the Canadian Surface Combatant program, is expected to spur increased defence-related activity in Halifax and Nova Scotia, but more in importantly in Atlantic Canada as a whole.

According to Kevin McCoy, president of Irving Shipbuilding, the project’s prime contractor, the company has already invested $350 million to get Halifax Shipyard ready for production and has created 500 jobs in 2015 alone. That process is about to speed up – at a sustainable pace.

“We will now be able to shift smoothly from production of Arctic Offshore Patrol Ships once they are completed to building the Canadian Surface Combatants,” says McCoy, who has worked tirelessly to advance the programs since taking over his post in 2013. “That will minimize the need for layoffs during the transition and preserve key skill sets throughout the process.”

Lockheed Martin: mission systems business set to expand
Glenn Copeland, director of business development at Lockheed Martin Mission Systems and Training (MST), which will be handling the mission systems work on the Canadian Surface Combatant agrees. “I am amazed at how fast this is all happening,” says Copeland. “A draft request for proposal is expected to be issued by the end of the summer and we have already received numerous preliminary documents.”

Mission systems are among the largest value-added inputs in naval construction. That makes Lockheed Martin MST, which already hosts 250 employees in the region, among the biggest winners in the new program. But there are many others. Irving Shipbuilding alone has given out nearly $1 billion worth of National Shipbuilding Strategy-related contracts to 200 lower-tier suppliers, many locally-based.

ACADA: an ever closer alliance
Copeland, a past president of the Atlantic Alliance of Aerospace and Defence Associations, recently moved to Ottawa, but gets considerable credit for advancing the region’s interests. It’s a cause he feels strongly about, and which he continues to contribute to from his new base. “A CADSI study recently pointed out that Atlantic Canada, which has less than 7% of Canada’s population, accounts for 17% of its defence sector,” says Copeland. “We stand a much better chance of building on that success if we work better together.”

Copeland thus continues to back efforts to merge various provincial aerospace and defence associations (from Newfoundland and Labrador, New Brunswick, Prince Edward Island and Nova Scotia) into one umbrella regional group, tentatively to be called the Atlantic Canada Aerospace and Defence Association (ACADA).

DEFSEC Atlantic: floor space sells out faster than ever
Timely metrics regarding Atlantic Canada’s aerospace and defence industry’s progress are few and far between. So quantifying momentum generated by recent developments is not easy. One gage will be traffic at DEFSEC Atlantic 2016, which will be celebrating its tenth anniversary this September. “Initial signs are encouraging,” says Colin Stephenson, the event’s executive director. “Booth space for the fall exhibition was sold out earlier than ever before.”

Stephenson cites several addition drivers of increased progress in the sector. These include initiation of steel cutting for the first of the Arctic Offshore Patrol Ships, - which is now nearly half complete - coupled with news that steel cutting will begin for the second vessel in coming months. Momentum stemming from work done by the new Institute for Ocean Research Enterprise is also helping as are growing efforts by SMEs to get into major OEM supply chains. “Interest is increasing nationally and internationally and the event has been drawing more local military personnel,” said Stephenson. “That makes exhibitors particularly happy.”

IMP Group: high quality jobs add value to local economy
One of Atlantic Canada’s defence sector’s best arguments when presenting their case before public sector officials relates to the high quality of the jobs that the sector creates. Many of the positions require specialized skill sets and high levels of training. Defence businesses often take lead roles in the process. For example Lockheed-Martin alone has taken on 130 co-op students during the past decade.

Another defence sector player, IMP Group, - which was selected by Canada’s Top 100 Employers competition as one of Nova Scotia’s Top Employers for 2016, - was commended for its: “… ongoing employee development, in-house and online training programs, including apprenticeship opportunities, formal mentoring and subsidies for professional accreditation.”

CAE: helicopter work on the civilian side, could spill over into defence
Another of strong defence sector contribution to Atlantic Canada’s economy relates to the way that some key players also build strong civilian businesses. This situation, - which is more common in the United States where Boeing popularized the concept - leads to recurring situations in which contractors’ civilian and defence divisions feed off each other’s success. Sometimes this happens directly. Other times less so.

One often cited example is CAE, which last month announced a partnership with the Hibernia Management and Development Company and the Research Development Corporation to operate a helicopter training center in Newfoundland and Labrador. This civilian center gives CAE personnel a much better lay of the land in the area, and the mandate positions it better to help it market defence helicopter simulators elsewhere.

Rosborough Boats puts its own funds on the line
The scale of Atlantic Canada’s aerospace and defence industry’s impact is particularly noticeable in the opportunities that it spins off to non-defence SMEs. One example is Rosborough Boats, which does general boat work, but which over the years has drifted into the production of custom vessels for use in police work, and by maritime patrol, search & rescue and scientific agencies.

Now Heaton Rosborough, who now runs this third-generation family business, has his eyes firmly fixed on the Multi Role Boat project. According to the Defence Acquistion Guide, this initiative, which could be worth between $50 million and $100 million, will equip Canada’s frigates with nine-meter class rigid hull inflatable boats, which it can use to conduct boarding operations, and to support humanitarian and disaster relief operations.

Experts say that the new vessels, - which will be shipped with a sophisticated command and control system and an accompanying crane system, so they can be lowered into the waters with their 12-man crew already in them, - will be considerably safer than existing equipment.

Rosborough is so confident of the company’s success that he is investing his own money to build a prototype. “The Royal Canadian Navy is particularly demanding and the last time these boats were replaced was decades ago,” said Rosborough. “That means there are not too many people around who have done this before. Our special applications capabilities position us well to help.”

Ultra Electronics Maritime Systems: helping to meet the threat
The naval sector’s growing role is also in part being driven by tensions in key global sea lanes says one expert. “With Vladimir Putin rattling his saber in the Baltic Sea and Kim Jong Un attracting attention in the waters off of Korea, we are getting quite busy,” says Leo Gaessler, senior vice president at Ultra Electronics Maritime Systems. “Demand for submarine detection products has increased considerably in several markets, notably South Korea.”

That’s particularly of the sonobuoys and towed-array sonobuoys, produced in the company’s Atlantic Canada facilities which are crucial in submarine detection. Nearly 70% of Ultra Electronics MS’s sales are exports. The weak loony, which boosts profits margins on export deals, which are generally inked in US dollars, is thus quite good news. Ultra Electronics Marine Systems also develops and produces command and control technology, which Gaessler believes is a perfect fit for the Multi Role Boat program.

Metamaterial Technologies; innovation in vision protection
On the air front, Canadian industry remains stymied by stagnation on the next generation fighter file. While the Liberal administration’s defence policy review process has raised hopes, it has also presumably delayed any decision until the process plays out.

Metamaterials Technologies hasn’t been sitting around waiting. The company has been rushing to help address vision protection vulnerabilities facing civilian and military pilots. According to Carl Daniels, the company’s vice-president (business development) falling prices of industrial lasers sold at sites such as Wickedlasers.com, now make it relatively easy for mischief makers to cause significant damage.

“Laser attacks can impair both human vision and equipment sensors,” says Daniels. “Attacks are also particularly hard to trace when launched near public places such as LAX and Heathrow airports. Our partnership with Airbus, to develop protective solutions, will fill a significant gap in the civilian market. We are also scouting out opportunities in defence.”

Cormer Defence lands in New Brunswick
Another player that continues to seek out opportunities in Atlantic Canada is Cormer Defence, a Manitoba-based provider of parts for both aerospace and defence OEMs. According to Mike Power, a spokesperson, the company recently completed renovations at its 30,000 square-foot Miramichi New Brunswick facility, and has been negotiating with providers such as BAE and Mack to do sub-assembly work.

Cormer Defence has also been trying to get naval work on programs such as AOPS, AJISS and CSC. However the process is hard and there are a lot of hoops to jump through. For example Public Services and Procurement Canada documents suggest that bidders need to be Major Equipment Item suppliers in existing programs and have a Lloyds certification prior to bidding on naval projects, otherwise they could be penalized.

This could hurt players like Cormer, which despite its extensive portfolio of defence clients, ranging from General Dynamics Land Systems, to Boeing and Bombardier, could find itself barred from competing effectively. Worse - overzealousness at PSPC could significantly boost project costs to already strained Canadian taxpayers. “They are on the right track,” says a hopeful Power. “But some of their specifications could create issues.”

Bluedrop: policy changes spur big wins
One Atlantic Canada company that is particularly well-positioned to take advantage of current industry trends is Bluedrop Performance Learning, says its chairman Derrick Rowe. Effective training capabilities, which were labelled in the Jenkins Report as a “key industrial capability,” (KIC) that Canada needs to focus on to build its defence industry, have been in increasing demand, due to tight military budgets.

Earlier this year the company won a $15 million deal to design training and simulations software for the Arctic Offshore Patrol Ships. The win provided a huge shot in the arm for the 25 employees at its Halifax office, who work on the program. Not long after Bluedrop won a USD $13 million contract from Sikorsky to provide instructors, training and course-wear, for CH-148 helicopter pilots and maintainers. Thirty Bluedrop employees, based at CFB Shearwater, just across from Halifax, will help oversee the mandate.

“Government moves such as the increased emphasis on SMEs in the defence procurement process and the focus on Key Industrial Capabilities, have changed the dialogue,” says Rowe. “They have enabled us to negotiate better deals, which are good for us, and good for the industry.”

CarteNav: the Canadian government has been a big contributor
Paul Evans, chief executive officer at CarteNav agrees, noting that they sensor software management player’s success (the company is actively recruiting and moving into a new 9,200 square foot premises later this year) provides a perfect indication that public sector support has been effectively-targeted. CarteNav has just come off its sixth straight year of record growth, has been increasing global exports and has been logging advances on the tech front as well. One key goal has been expanding the capabilities of its flagship AIMS-HD mission system software.

The system processes live video and data from cameras and other sensors (radar, AIS, searchlight) and geo-references and displays that data in real-time in a customizable user interface. In June the company announced that it has tested the AIMS software with several Airbus DS Optronics multi-sensor cameras. Integration of the two capabilities will enable both companies to better service the intelligence, surveillance and reconnaissance markets.

ACOA and CyberNB: public officials kick in
Another unique feature about Atlantic Canada’s aerospace and defence industry relates to the degree of collaboration between public sector officials and industry personnel. Anecdotally at least relationships appear to be closer than in other parts of the country, if for no other reason than the defence sector’s larger relative weight there.

Several people CDR spoke with favorably noted the Atlantic Canada Opportunities Agency’s support for the industry. The New Brunswick government also gets a tip of the hat for its launch of CyberNB, a bid to establish a Canadian Institute for Cybersecurity in New Brunswick.

Will the DRP throw a wrench in things?
Cynics however would suggest taking current regional optimism with a grain of salt. One dash of cold water stems from the fact that several of Canada’s Minister of National Defence Hargit Sajjan’s recent moves are confusing – to say the least.

For example pushing forward the Canadian Surface Combatant while the government is in the midst of a Defence Policy Review, which is being conducted to determine what equipment it will need, seems like putting the cart before the horse.

Further confusion stems from inconclusive comments by government officials at a recent Industry Day regarding CSC offset requirements. At issue is whether Jenkins Report recommendations that procurements foster the defence sector’s Key Industrial Capabilities will be enforced. If suppliers can meet offset dollar requirements, by providing non-defence inputs, it would be a huge blow to the sector. (Public Services and Procurement Canada and Industry Canada officials did not immediately provide comment).

The final worry relates to the Canadian governments’ readiness to back-up its defence procurement pledges. Previous regimes were notorious for holding photo ops-related to procurement initiatives, many of which were delayed or never occurred. During coming months we will get a hint as to whether the Liberals are any different.

Highlights: Atlantic Canada’s aerospace and defence industry*

Total companies: 200+
Employment: 10,000+
Annual revenues: $1 billion
Military bases: Seven facilities, including three super-bases
Royal Canadian Navy assets: Seven Halifax-class frigates, 1 destroyer, 6 marine coastal defence vessels, 2 Victoria-class submarines
CF personnel and civilian staff: 24,000
Annual Atlantic Canada military budget: $1.6 billion
*ACOA

Peter (at) peterdiekmeyer (dot) com

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peter@peterdiekmeyer.com

Peter Diekmeyer Communications Inc.