- July 11, 2002
Strong growth prospects affected by globalization, new technology, changes to R&D incentives
by Jim Barnes
The global economic downturn in 2009 hit the Canadian aerospace industry hard and the total of just over 400 aircraft ordered was painfully low. Since then, the recovery in the industry has pretty well kept pace with the general economic recovery, but there are a few clouds in the sky.
In 2009, makers of aircraft and aircraft parts in Canada generated about $11.0 billion in revenue, according to The Strategic and Economic Impact of the Canadian Aerospace Industry. Deloitte & Touche published that research in October 2010 for the Aerospace Industries Association of Canada (AIAC).
Respondents to the research at the time were optimistic. Some 80 per cent said that business conditions should improve significantly over the following three years.
The industry does not seem to be breaking out the champagne, though. “The recovery is not strong, yet,” says Haley Dunne, senior spokesperson, Bombardier Aerospace. “We have been hoping for a year now that it would pick up faster than it has on the commercial aircraft side.”
More than 77 per cent of the industry’s revenues come from exports. The US is the biggest customer, accounting for about 57 per cent of revenues, according to the AIAC research. That may not last.
“A shift in the industry is underway towards low-cost, high-GDP areas including Asia Pacific and Latin America,” notes the document. “North America is still our largest installed base, and will be for a very long time,” says Dunne. However, export markets have grown dramatically in the past decade. She notes that about ten years ago, the split of North American sales versus sales to the rest of the world would have broken down at approximately 70/30. “Now, that has almost flipped.”
A company like Bombardier must embrace globalization. “We have to have more manufacturing capacity close to the emerging customer base,” says Dunne. Beyond maintaining service levels by producing parts locally, “it’s a question of having local roots, making investments in those markets. That gives us a better understanding of those markets.”
Another cause for optimism in the industry is the arrival of a new generation of aircraft. “Besides composites, technologies related to improving engines in terms of fuel consumption and emissions are keys to the success of the industry,” notes Martin Vézina, leader–Aerospace & Defense, Deloitte & Touche LLP.
The rising price of fuel is driving interest in new, more efficient aircraft. “Greener” aircraft—producing fewer emissions and less noise—are also drawing attention.
“The environment has to be a very important component in the design, manufacture and maintainability of our aircraft,” notes Dunne. Nearly 94 per cent of respondents to the AIAC survey said they felt “substantial” pressure to become more environmentally responsible over the next three years.
The workforce is another core issue for this industry, which employed nearly 79,000 people in 2009. Production staff accounted for the lion’s share, at over 47 per cent of the total.
Staff shortages are causing concern. Many respondents to the AIAC survey indicated that the greying of the Canadian workforce and the boom in retirements would become problems, hampering access to a qualified workforce. The need for training is acute.
The other challenge is the cost of labour, notes Vézina. “Countries like Mexico and some parts of the US have much lower labour costs. We need to improve productivity by acquiring equipment to automate processes and remove some of the pressure resulting from the cost of labour.”
Like many manufacturers, productivity growth has been under the spotlight at Bombardier Aerospace. “We have undergone quite a transformation in our manufacturing facilities over the past five or six years,” says Dunne. “We are involved in lean manufacturing, as well as the 'Achieving Excellence' system, which impacts every aspect of the corporation, from plants to administration.”
As demand for aircraft grows and as its new programs come in, Bombardier will have to address capacity issues. “We are expanding our manufacturing footprint accordingly. We have to refine our processes more and expand our manufacturing capabilities,” says Dunne.
The Canadian defense aviation market is different from many other countries, says Vézina. The current government has not shied away from defense expenditures, while other nations are looking for ways to cut their military budgets. While the multi-billion dollar F-35 program recently became a political football, the government announced an investment of $5.2 billion in the Coast Guard fleet in the recent budget. The expenditure will include both ships and helicopters.
“We hope that these programs will help attract investments. We also hope that the smaller players in the industry will be able to benefit from these investments. The IRBs (industrial regional benefits) will help maintain or increase investment in Canada for those industries,” says Vézina.
From a global perspective, the commercial aircraft sector is likely to enter a prolonged up-cycle in production in 2012, according to the 2012 Global aerospace and defense industry outlook: A tale of two industries. Deloitte Touche Tohmatsu Ltd.’s Global Manufacturing Industry group published the research.
Over the last few years, the global industry has delivered about a thousand large aircraft per year. “Studies show that the demand for aircraft over the next 20 years will be roughly 30,000 aircraft, which means an average of 1,500 per year. There is huge pressure on the supply chain, and we hope that Canada will get its share. Other countries like China, Brazil, Russia and India are investing massively,” says Vézina.
The opportunities lie in the supply chains of the major aircraft OEMs. “The large OEMs don’t want to deal with thousands of suppliers. They want to deal with as few as possible, and transfer some of the risk to Tier One, Tier Two and Tier Three suppliers,” says Vézina. “We should see more consolidation in the industry as well as the appearance of Tier One integrators that deal directly with the smaller suppliers and integrate parts which could be sold to larger OEMs.”
The bottom line? The business is there to be had, but Canadian suppliers will have to fine-tune their workforces and productivity, make savvy investments in R&D and gravitate toward top-tier status if they want to compete.
The aerospace industry has made significant investments in R&D and in property, plant, and equipment over the years. In 2009, it invested some $1.9 billion, of which R&D comprised 72.7per cent, according to the Aerospace Industries Association of Canada (AIAC) report.
Before the last federal budget, Canada offered some of the more positive R&D tax incentives globally. That may have changed. The government has de-emphasized entitlement programs like the Scientific Research and Experimental Development (SR&ED) tax credit and turned towards direct funding.
In its response to the budget, AIAC hailed overall levels of support—while raising some concerns. “The proposed changes to SR&ED have the potential to counteract some of the other positive changes the government has proposed in the budget,” notes David Schellenberg, chair of AIAC. “…Reducing the SR&ED tax credit rate from 20 to 15 per cent and the decrease of the eligibility rate for subcontractors from 100 to 80 per cent, in particular, may well have the opposite effect.”
In the AIAC research conducted in 2009, most respondents did not believe the Canadian government provided enough funding to the industry. Nearly two-thirds said governmental funding is not adequate when compared to other countries. SMT
Jim Barnes is a Toronto-based journalist with more than 30 years of experience in writing about manufacturing technology.