Canada’s aerospace industry – the view from 40,000 feet

Canada’s aerospace industry – the view from 40,000 feet

Sector series: Aerospace

The global aerospace industry is growing faster than the global economy and that’s good news for the Canadian players, a group of 700 companies of all sizes from coast to coast. The Canadian segment currently employs 180,000 people and contributes $29 billion of GDP to the Canadian economy each year.

ExportWise sat down with Iain Christie, executive vice-president of the Aerospace Industries Association of Canada, to talk about the state of the industry in Canada and around the world.

What are the major opportunities and challenges impacting Canada’s aerospace industry?

The opportunity is in the fact that the industry is growing quite a bit faster than the global economy. It’s on the order of trillions of dollars of aircraft that will be bought over the next 20 years. There will be vast increases in the amount of air travel, especially in Asia. Even pessimistic estimates say that aerospace manufacturing will continue to grow at a rate higher than the global economy. That’s the major opportunity — it’s a growing industry.

The challenge that Canada faces is that our companies, by and large, are smaller than critical mass, because we are moving into a phase where we’re not designing new airplanes as much as moving into high rate production of new designs. The OEMs (original equipment manufacturers) and the production of large system integrators are really focused on suppliers who can deliver, and that means delivering stuff that is sufficient quality, on time, and reliably with the ability of the production lines to scale up. And, there is a mandate on the part of almost all of those large organizations to reduce the complexity of their supply chain as a means of reducing their cost structure. It is a very cost-competitive environment. So if they have suppliers that are good at doing one thing, they’d like them to do two or three things so that they can consolidate supply chains. All of that implies that you have achieved a certain scale so you can meet the initial expectations, but you’re also able to add scale quickly. Being large enough and also being able to add the scale that comes with success are really the major challenges.

I don’t mean to say companies need to be large, they just need to be large enough and that’s on the order of $50 million [in revenue] with 150 to 200 employees. That seems to be the benchmark that a lot of the OEMs kind of set as the barrier to entry, but really, it’s about whether or not you can handle production in the volumes they need. A company might have to add four to five times their manufacturing capacity in a very short period. And it’s not just having the capacity to handle that, it’s also having the financial capacity to finance a lot of that growth because the OEMs aren’t necessarily providing the financial [incentives] to allow that growth. Before they wanted companies to share risk in other ways. Now the risk they’re asking companies to take is the expansion risk. To some extent, they’re kind of agnostic to the capital investment that implies. They don’t care what you need to do to meet their demand. They just want it met.

Being able to have access to the kind of financial resources that would allow expansion at that rate implies a certain degree of sophistication and a certain size of company, just to be in the place where you can have those conversations.

How many Canadian companies would be in that sweet spot of $50 million in revenues and 150 to 200 employees?

I don’t know the exact numbers on that but it’s a countable number. It’s not that it’s countable on one hand, but it wouldn’t be 100 either. It’s not a large fraction of the 700 companies.

What are the characteristics of successful of aerospace companies?

The hallmark of success right now is companies that really understand their customers’ problem. They are innovative, but also disciplined in figuring out a way to address the problem their customer wants solved. I mean problem in the sense of business problems. Companies that are being successful understand how to add real value for their customers. This can come from vertically integrating processes, or an innovation that simplifies or streamlines the OEM’s manufacturing processes and allows them to consolidate the supply chain. It really is about understanding what your customers need and want, and a lot of that is around reliability and efficiency. If you can show your customer that you understand their real requirements and have solutions to those problems that they hadn’t seen elsewhere, that is an almost sure ticket to success.

Please help us understand the role of exporting to Canada’s aerospace industry.

The answer to that is simple: 80 per cent of our products are sold offshore. We don’t have an industry if we don’t export. I don’t think I know of an aerospace company that doesn’t sell outside of Canada. There just isn’t enough business in the country to maintain any kind of a supply chain. There are well over 10,000 new aircraft on backorder around the world, and almost all of those are with major aircraft manufacturers who are not located in Canada. So if you want to be a successful supplier, you have to be exporting your goods to manufacturers in other parts of the world.

Supply chains are significant in the aerospace industry. How can a Canadian company get into an aerospace supply chain?

The motto Canadian companies need to have is “we’re better than your worst supplier.” Supply-chain management sections of the big companies are under a lot of pressure to reduce costs and to increase reliability. Canadian companies that can prove they can perform better than people in that existing supply chain will do well. It really is a meritocracy these days. They are very competitive on price and volume and so they are very serious about having competitive supply chains. Being competitive is the best way to get work, but you have to be competitive on things that the primes and tier ones want and need.

The big guys are constantly monitoring supplier performance and they’re weeding out the ones who aren’t meeting their needs. It’s a brutally competitive world, but there are real opportunities to expand quickly. It’s not for the faint of heart, that’s for sure.

Do you have any advice for small and medium enterprises in the aerospace industry?

Right now, the OEMs are focused on aircraft delivery. They know how much they’re selling their aircraft for, now they need to produce them at the price they promised their customers. They are under a great deal of pressure to execute and they’re passing that pressure down the supply chain. If you’re prepared to meet that demand, you’ll be very successful. Every company is different because of the things they supply. In general, you need to perform in a demanding environment and you need to be prepared to be asked to perform better. You can grow quickly and make a very successful living. It is a very competitive environment right now.

One of the things we’re working on is that companies that are successful in the long term should give some consideration to inorganic growth strategies. They could partner with someone who has a product or complementary process to theirs, so they don’t have to ship it to the OEM and then have them ship it to another supplier. Or maybe you can add capacity by getting together with other companies that offer the same kind of product or service that you do. Having partners in other countries so you can each have a domestic buyer in each others’ market makes sense. There are all kinds of ways small companies can and should look at partnering to grow inorganically. That’s where a lot of the innovation will happen in the next little while. It’s less technological innovation and more business-process innovation and the companies that are good at that will find a good home. If you can serve their customers well, they’ll reward you.

What’s in store for Canada’s aerospace industry?

I think it’s going to grow at the rate that the global industry is growing. In addition to having very sound science and engineering, we also have very sound and experienced business people in the country. I frequently say that doing science and engineering in the aerospace industry is difficult, and learning how to make money doing it is a lot harder. I think a big advantage that we have as a sector is that even over some low-cost jurisdictions, we have experienced business people who know how to run a profitable business doing this work. They know how to identify customers’ needs and how to run a business that’s capable of satisfying those needs. Those are the kinds of advantages we have. That strength will express itself. As this expansion continues, it will become harder and harder for the big guys to find enough suppliers. Right now, it’s a bit of a buyers’ market, but that will switch as we get into the heart of the major production run. I think companies with strong fundamentals will prove it to their customers, and I think a lot of those companies will be in Canada.

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