Volume 1: Beyond the Horizon: Canada's Interests and Future in Aerospace – November 2012

Part 2
Context (continued)

Chapter 2.3
Opportunities and challenges

As it faces changing market and production conditions, the Canadian aerospace industry has a number of key strengths. These include its long track record, demonstrated ability to innovate and adapt, world-class technological capabilities, highly skilled workforce, vibrant and diverse centres of activity, exceptionally close relationship with the American industry, and reputation for reliability.

These qualities—supported by a web of academic and research institutions, trade agreements, public policies of general application designed to foster productivity and competitiveness, and sector-specific programs—are core to the success of the Canadian aerospace sector and help position it to seize emerging opportunities.

The fortunes of Canadian firms depend on capturing a meaningful portion of the demand for military and civil aircraft, both in emerging markets with rapidly expanding fleets and in established markets where commercial carriers plan to replace aging planes with more fuel-efficient models.

For Canadian original equipment manufacturers (OEMs), this means identifying which markets are likely to be most receptive to Canadian offerings and vying with huge players like Boeing and Airbus. Bombardier has launched the CSeries because it believes that there will be demand for more fuel-efficient aircraft in the lower end of the single-aisle segment of the market. Its partnership with China's national aerospace firm, Comac, should facilitate access to the enormous Chinese market and help both companies compete globally. Other OEMs are also endeavouring to access emerging markets: Viking Air, for example, has found buyers for Twin Otters in China, Russia, Vietnam, Argentina, Peru, and Turkey, and Bell Helicopter Textron Canada is expanding sales of commercial helicopters in countries such as Brazil, India, and China.

For Canadian tier 1 integrators and smaller suppliers, the opportunity presented by rising commercial demand is different: they must strive to secure a place on the platforms that all OEMs, wherever based, are developing to meet this demand. Because the design, development, and manufacture of a new aircraft is such a long-term undertaking, to be frozen out of its supply chain means lost sales, not simply for the immediate future, but for years and perhaps decades. Although a proven record of reliability and a history of partnership with an OEM are to the advantage of integrators and suppliers, in a globalized industry, price and quality considerations frequently trump sentiments of loyalty between OEMs and suppliers. Each new product results in a new wave of negotiations and contracts. To succeed, Canadian firms must be included in design conversations and sales consideration from the outset, and demonstrate that they can offer excellent products at competitive prices. Long-term supplier relationships will be a product of consistently high performance to a global standard.

A substantial slice of the global demand for aerospace products can be met only through innovations that meet customer expectations in areas such as fuel efficiency, noise abatement, and the ability to service isolated locations over long distances, and monitor coastlines. Canadian technological capabilities, as well as patterns of collaborative research within the aerospace sector's centres of activity, should help. So should the country's geography, which creates a natural domestic market and proving ground for innovations in some of these fields.

But even as existing aerospace markets expand, new markets emerge, and demand grows for cleaner, quieter technologies, the Canadian aerospace sector faces challenges.

First, countries such as China, Russia, and India do not simply offer expanding markets for Canadian products. Their own aerospace ambitions make for increasingly fierce competition. These new players—and some established aerospace nations as well—are more inclined than Canada to stray from open and competitive market principles in order to develop products, out-manoeuvre competitors, and capture sales. They have not been hesitant to use the power and resources of the state to incubate, support, and grow their own aerospace industries—whether that means having the state take partial or outright ownership of aerospace companies, providing generous public support for aerospace research and commercialization, or aggressively using state-directed procurement.^{Footnote 3} Furthermore, they are not always parties to international agreements that apply to the aerospace sector, and even where they have signed on, the transition to full implementation of the agreements' provisions can take years, and there will likely remain a readiness to test those agreements' limits.

Second, access to emerging markets can be unpredictable and, in some cases, depends on establishing a production footprint that satisfies foreign governments. Given the intense competition for market position in these countries, Canadian firms, despite their efforts, could be shut out. The not-so-subtle link between operations and sales in countries with growing aircraft markets could also make it more difficult for Canada to attract foreign aerospace firms to establish subsidiaries and place facilities in this country, where the market is small and access to it is not contingent on local operations.

Third, the globalization of supply chains has reduced the advantage Canadian companies once enjoyed as a result of geographic proximity to Bombardier and Boeing. This has been accompanied by competitive pressure on suppliers to consolidate—as OEMs and tier 1 integrators increasingly prefer to deal with a manageable number of proven suppliers—and to conduct the research necessary to develop new or updated systems or components, forcing them to shoulder new costs, accept more risk, and build design capacity not required in the past.

Fourth, rising oil prices over the last decade have led to a surge in the price of fuel, which currently accounts for about one-third of airlines' operating expenditures. As fuel costs rise and profits shrink, airlines are bargaining harder with aircraft manufacturers, squeezing margins throughout the aerospace supply chain.

Fifth, declining defence budgets among Canada's allies are shrinking demand and prompting the producers of military aircraft to be ever more assertive in holding on to maintenance and repair work and the technical data required to perform that work. Similarly, in the civil aerospace segment, Canadian companies specializing in aircraft maintenance and repair are being squeezed between OEMs who wish to retain a greater share of this high-margin activity and low-cost MRO providers, many of whom are closer to the growing markets in Asia, Latin America, and the Middle East.

Finally, the aerospace industry is inherently cyclical, with ups and downs driven by the long lead times needed to design and commercialize new products and platforms, the instability inherent in aerospace manufacturing schedules, and the fluctuations in capital spending by customers in the civil and military markets. When sales dip, Canadian firms are vulnerable to the loss of highly specialized employees, who may be lured out of the country by offers of employment from foreign competitors. This risk is heightened during a period when firms and governments from other countries—particularly those committed to quickly building their own industries—are searching the world for the best talent.

The Canadian aerospace sector is at a critical juncture. Emerging conditions carry tremendous potential for growth in sales, increased profits, more high-quality employment, more technological progress, and increased prosperity for Canada. But there are also real risks of contracting market share, diminished industrial capacity, and the loss of innovation and skilled jobs. Industry, government, academic and research institutions, and unions—individually and collectively—will have to undertake a series of practical, results-focused actions to respond to these conditions. If we get it right, Canada will still be a global aerospace power to reckon with 30 years from now.

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Footnotes