As the fifth-largest aerospace market in the world, Canada’s aerospace supply chain is rich with small and medium enterprises (SMEs). In 2014, the Canadian aerospace industry contributed $29 billion to Canada’s GDP. Nearly 20 per cent of aerospace manufacturing activity is dedicated to research and development and represented a $1.8 billion investment in 2014. The bulk of Canada’s aerospace manufacturing is centered in Montreal and surrounding areas, with the province of Quebec accounting for 56 per cent of the industry. Ontario is next with 23 per cent while Western and Atlantic Canada had 14 and seven per cent respectively. However, when it comes to maintenance, repair and overhaul (MRO), Western Canada has the bulk of the business with 41 per cent while Ontario, Quebec Atlantic Canada have 29, 19 and 11 per cent respectively.
Globally, Canada’s aerospace manufacturing ranked No. 1 in civil flight simulation in 2014, No. 3 in civil aircraft production and No. 3 in civil engine production, No. 1 in turboprop engine production and No. 1 in helicopter engine production.
When it comes to exports, 85 per cent of everything made in Canada is exported. A total of 60 per cent of Canadian aerospace exports are supply-chain related; 49 per cent of those were engines, 12 per cent were landing gear, 16 per cent were avionics and 23 per cent were other parts. The fastest growth on the export side has been landing gear, which grew by 185 per cent between 2003 and 2013 and accounted for close to 20 per cent of the overall growth of total exports for Canada.
Exportwise sat down with Robert Caouette, EDC’s Aerospace Sector Adviser, to get a better understanding of the sector and the opportunities for Canadian businesses.
What kind of companies export in this sector?
The aerospace sector is very export-rich. Most companies do export, from the SMEs right to the large multinationals. However, a lot of the companies that sell to the likes of Bombardier or Pratt & Whitney here in Canada don’t consider themselves exporters because they deliver in Canada. Yet, almost everything that is made by the OEMs (original equipment manufacturers) in Canada is exported. So there is a lot of indirect exporting that goes on. A lot of smaller companies, at the tier two and tier three levels, are at an early stage of the supply chain, but they go into larger assemblies that end up on a plane.
How would you characterize the export opportunities for companies in this sector?
The bulk of Canada’s supply chain is too small to handle the volume that a Boeing or an Airbus requires, and they present too much risk to large OEMs. So the opportunities for Canada are to sell to the tier-one suppliers. Companies like Triumph, Zodiac Aerospace and B/E Aerospace – these are the major tier ones, and Airbus refers to them as their super tiers because they are the largest suppliers across their various platforms. So, for a Canadian company, their strategy can’t be ‘I want to sell to Boeing.’ It has to be ‘I want to sell a widget that goes on a Boeing plane, but I’ll be selling it to a Boeing supplier.’
Where are the export opportunities for companies in the aerospace sector now?
Because the bulk of the supply chain is made up of SMEs, realistically North America remains their target. Airbus opened a new assembly facility in Alabama late last year where they’re assembling the A320 family. Boeing continues to grow its output on the 737 platform, so there’s a lot of opportunity in North America.
The major demands of OEMs are all about technology. That means improving the efficiency of the planes, whether it’s fuel efficiency or just operating-cost efficiencies, and also improving the in-flight experience. When they hear that term, many automatically think of entertainment systems on a plane, but it’s not just that; it’s anything from lighting to seating to air-quality to the size of the windows. It’s everything that makes a passenger experience more favourable.
Airbus will tell you they’re losing market share to Boeing because Boeing has a better interior package. So they’re looking at how to improve the in-flight experience of the passengers.
Several Canadian companies are market leaders in that space. There’s been a lot of research and development in Canada, and a lot of focus on that.
Are there supply-chain opportunities for companies in the aerospace sector now?
The Canadian aerospace sector is about 70 per cent supply chain and 30 per cent what they call MRO — maintenance, repair and overhaul. Once the plane is delivered to an airline, that plane has to be maintained periodically, after a certain amount of hours that it flies. The engines have to be rebuilt. Canada has a lot of strength in the MRO space, and we’re seeing huge opportunities for MRO companies to grow.
We’re seeing recent MRO growth in Asia because of the number of planes being delivered to that market. With the growth of the Asian middle class, air travel is becoming more and more popular. And, they just don’t have the MRO infrastructure to handle the growth, so there’s a lot of options for Canadian companies. All the big guys are there: Standard Aero [a company out of Winnipeg, probably the biggest MRO shop out of Canada], Pratt & Whitney and Bombardier have MRO facilities in Singapore. For the most part, the companies that have invested in those markets are our biggest players in the industry.
What’s significant about it is that you don’t have to be localized to win bids. You can still be cost-competitive doing the work in Canada. When you rebuild an engine, they take the engine off the plane and ship it to wherever it needs to be rebuilt. Whether they’re shipping to the U.S. or Canada or wherever it might be, the shipping costs aren’t prohibitive to win that business. So the industry can be competitive in the MRO space.
What are the characteristics of companies in the aerospace sector that do well at exporting?
Quebec has a program called the MACH Initiative, which is designed to optimize the performance of Quebec’s aerospace supply chain and increase its global competitiveness. Companies involved in these initiatives are generally experiencing positive growth. You have to be in Quebec to be part of that, but a national program is coming online at some point. It’s the companies that take advantage of the support that’s out there that do best. Companies working with the National Research Council’s Industrial Research Assistance Program, for example, do well in spending on research and development and developing new processes.
Other companies that are doing well are those that are vertically integrated. A company called Cyclone Manufacturing in Mississauga, for example, is a precision machine shop. They take chunks of metal and machine it down into gears and that sort of thing, but they don’t just machine the metal, they also treat it and paint it, and they have all the vertical integration that they need, so they don’t have to depend on sub-suppliers to finish a product. They can finish it from beginning to end. Companies that are vertically integrated are a lot more attractive as a supplier than those that are not.
What are some of the mistakes that companies in the aerospace sector make?
Right now, Mexico is a hot and cold market. Some early adopters have gone and unfortunately not done very well. The problem is that the industry is not requiring you to set up shop in Mexico. It is left to the supplier to decide whether setting up shop in Mexico can present a cost savings, and make them more competitive.
Neither Airbus nor Boeing has required any of their suppliers to be within a certain radius of their assembly plants. So companies that are going to Mexico right now are doing it in anticipation that it will save them money and that they’ll be able to take advantage of the business they expect will end up there, but right now it’s purely about cost saving.
What should companies in this sector know about exporting that they don’t know?
A lot of it we’ve talked about. What they have to keep in mind is that the size of this industry makes it tough for them to succeed against the larger players, so consolidation is something they need to keep an eye on — and collaboration. If consolidation is not something that they’re open to, collaboration is something that they need to start thinking of. If you’re not vertically integrated, then you have to get partners to become virtually vertically integrated so that you have a full package to offer a Boeing or a tier-one supplier, rather than going in and offering just one part of the package.
How can EDC help companies in the sector?
The biggest challenge in the sector is the financial one. There aren’t a lot of banks that are very active in the industry and those that are don’t have specialized groups, so they don’t fully understand the risks involved in the industry. EDC has had lot of lift over the last little while in supporting the financial needs of a Canadian exporter and working with their bank to increase their working capital lines. We’re also looking at how we can help them on longer-term development contracts.
When a new plane is being developed by a Bombardier or a Boeing or an Airbus, they’ll go to their suppliers and tell them if they want contracts, they’ve got to invest into the platform. That might mean they have to invest in research and development, and bear those costs. It used to be that Boeing would go to a supplier and say, ‘We’ll pay you to develop the landing gear for this plane, and pay you quarterly, or semi-annually, for your development costs, and then when the plane gets built, you’ll be supplying onto this plane.’ These days, Boeing will go to that same supplier and say, ‘Okay, if you want to supply to us, you have to pay your own money to develop landing gear, and once we sell the plane, we’ll pay you a little more for every plane we sell to help you recover those investment costs.’ For a supplier that is developing or involved in a new platform, they need a lot more liquidity to be able to support the research and development on that new platform. So it’s an investment they need to make over five to 10 years.
EDC and our partners are looking at trying to help fill that gap. Seven- and 10-year investments become a little more difficult, but the shorter-term investment is something we’re looking at trying to support more so that Canadian companies can get involved in the early stages. Because once you’re involved, an OEM building a new plane will sign a very long-term agreement with a supplier and they’ll sole source.