When Industry Canada tried to put together a strategy for Canada's aerospace sector in 2004, it stalled in mid-air.

"The government had too many departments working in different directions. In a globalized industry, you have to harmonize your efforts. That wasn't happening," says Michel Legault, manager of business development for Bell Helicopter Textron Canada Ltd.

In late 2004, Industry Minister David Emerson sought help. It arrived in the form of the Canadian Aerospace Partnership (CAP), a task force organized by the Ottawa-based Aerospace Industries Association of Canada (AIAC) to define exactly how to keep Canadian companies competitive.

"What everyone knows is that aerospace is a key component of an advanced knowledge-based economy. What we've now realized is that if we want to compete successfully, we can't do it on an ad hoc basis anymore," says Peter Boag, AIAC president and CEO and head of CAP.

Ashley Fraser, Business Edge
Canadian Aerospace Partnership head Peter Boag wants policies that can help all companies survive on any playing field.

At stake is the health of Canada's $21.5-billion aerospace industry - about five per cent of world output - that employs 85,000 people in more than 400 companies across the country.

CAP's pedigree is solid with 22 private-sector members, mainly CEOs of Canada's biggest industry players (most are subsidiaries of multinationals) as well as Emerson, five provincial cabinet ministers, and representatives from two labour unions and two academic institutions.

At a recent meeting, CAP said its goals for the next 20 years include sustaining Canada's ranking in the top five aerospace nations. Among other things, it also recommended increasing research and development, and identifying major international projects that the Canadian industry could participate in. Emerson said they were "substantial proposals for the government to consider in the aerospace strategic framework we are developing."

Unlike other industries, aerospace in Canada has a precarious twist, since 80 per cent of its output is exported. Of the exports, about 85 per cent is for the commercial airline business, which is only starting to recover from the slump that followed the attacks on New York and Washington, D.C., in 2001. About 12 per cent of sales are defence-related and most of that flows from the U.S. military.

While it is often debated whether the Canadian government should be in the business of protecting export markets, CAP plans to show it can't afford not to because aerospace has one of the biggest trickle-down benefits of any business sector.

Each direct job creates three indirect jobs, according to the International Association of Machinists and Aerospace Workers (IAMAW). The industry also had the highest positive trade balance of any Canadian industry in 2003 - about $5 billion, IAMAW adds.

For Canada to retain its rank as the fourth-largest aerospace industry in the world - after the United States, Britain and France - companies must learn to cope with heavily subsidized competitors in the U.S. and Europe.

Airbus, which is based in France, has received $3.8 billion US in research and development subsidies from European Union countries to offset the $15 billion it has spent so far on its A380 project. (The A380, which is scheduled to go into service next spring, has 555 seats over two levels.)

"The government has to decide whether aerospace is an industry worth having and that means (policies) that keep jobs at home," says Dave Ritchie, IAMAW's general vice-president for Canada.

"This has to start with enhancing R&D, which is the driver for everything else. Without healthy R&D, this industry is dead here," Ritchie says.

CAP will also have to define how Canadian government policies can create an economic environment conducive to keeping multinationals operating here.

"I don't think we can ever have a truly level playing field when dealing with the (subsidized) structures in Europe and America," says Paul Kalil, president of Avcorp, which manufactures aircraft parts and assemblies in Delta.

"Right now the best we can do is to know where the government stands so we can proceed with some certainty," he says.

Avcorp's 600 employees and $85 million in revenue are geared to three main customers: Boeing, Cessna and Bombardier. Kalil says Canada's industry can remain competitive only if the government is willing to make sure manufacturing does not seep out to low-priced markets.

CAP's Boag wants policies that can help all companies survive on any playing field. He also believes that government must invest more in technology, leverage more international programs that Canadian companies can participate in and create more favourable public procurement policies at home. Market access, productivity and improving workforce skills are second-tier issues.

"This is a mobile industry of (cross-border) partnerships right down to the factory line. Foreign companies are not here to service the domestic market. Their goal is to serve global markets from Canada, so long as Canada is a good place to do business," Boag says.

"CAP's goal is to find the integration points that best serve local (producers)," he says.

One piece of good news is that industry sales are starting to recover. The Conference Board of Canada says local sector profits will rise 33 per cent this year, to $1.3 billion, although Boag says he believes the number is overly optimistic.

Growth is returning, however, despite cutthroat competition in the commercial airlines sector, a U.S. defence industry that is becoming more selective about who gets to do sensitive work and World Trade Organization (WTO) rules that stifle most attempts at protecting Canadian content.

CAP's blueprint will not change the makeup of the Canadian industry, which has expertise in every sector from simple flanges to space shuttle imaging devices. Nor will it try to change regional segments: 54 per cent of the industry operates in Quebec and 33 per cent in Ontario, with the rest split between B.C., Manitoba and a rapidly growing segment in Nova Scotia.

It will try to increase Canada's competitive stature through public-sector investment, however. One of the immediate problems is the lack of a defence industry to leverage commercial growth.

Of Boeing's $50.5 billion in revenue in 2004, $27.6 billion came from military sales. For Airbus, $25.2 billion of its $60.2-billion revenue came from military sales.

Only $2.4 billion of Canadian industry revenue of $21.5 billion resulted from military sales in 2004.

"Defence (contracting) is what we call a legal bypass to the WTO. It is important to find money here in Canada to help compete against companies who are actually supported by the defence industry," Bell Helicopter's Legault says.

One solution would be to have Export Development Canada (EDC) increase financing of international projects for Canadian companies.

EDC already has about $7 billion in aerospace financing (one-third of its overall portfolio) and added $2.4 billion in fiscal 2004.

Another solution would be to require Canadian content on big contracts such as Bombardier's upcoming C-series jets, similar to the strategic Maritime Helicopter Project, although this would have to comply with trade organization regulations.

To some extent, CAP will also have to deal with regionalism.

In January 2004, the Aerospace Action Partnership (AAP) was started in Ontario with a stated priority of getting a sales equity guarantee with Quebec.

In recent years, between 75 and 90 per cent of EDC aerospace export financing has favoured Quebec companies.

The AAP, which is a public-private partnership, is made up of Toronto Economic Development, the Ministry of Economic Development and Trade, Industry Canada, Canadian Auto Workers, IAMAW, Bombardier and the Ontario Aerospace Council.

"From an Ontario perspective, we have to make sure the federal government recognizes the importance of Ontario's industry, but we definitely need a strategy that can spread out work across Canada," says Joe Cordiano, Ontario's minister of economic development and trade.

Yet CAP is a nationwide initiative and must get the policy and program delivery environment right, says Richard Neill, CEO of Toronto-based Magellan Aerospace Corp. and chairman of CAP's committee on technical development and commercialization.

"It may require getting (companies) to give up their fiercely protected pockets of influence. It may recommend directing companies toward the right products. CAP is an exercise in finding the most efficient ways of doing things," he says.

"We're still at a macro level right now, but we have to look outside national boundaries because that's where the industry will get its chance (to survive)," Neill says.

(Mike Levin can be reached at levin@businessedge.ca)