With Prime Minister Stephen Harper having committed $15 billion last June to buy new cargo planes, heavy-lift helicopters, trucks and troop-carrier ships for the Canadian Forces, it's not surprising that the country's defence contractors are gearing up for a rearmament boom.

Even though most of the hardware will be bought "off the shelf" from foreign vendors, with relatively little domestic content, the Boeings, Lockheed Martins and other contractors are required to provide "offsets" - work on other projects - of equal value to Canadian companies.

"There is certainly a lot of pent-up expectation in the defence industry with regard to participating in these various programs," says Richard Ackerman, vice-president of business development at L-3 Communications Electronic Systems in Toronto.

But even as it prepares for this procurement bonanza, the Canadian defence sector is already enjoying an expansion.

John Watts

"We've been growing rapidly, we're bursting at the seams," says Lee Carson, director of Department of National Defence accounts management for Richmond, B.C.-based MacDonald, Dettwiler and Associates Ltd. (MDA).

Adds Michael Gervais, senior vice-president of business development at Calgary-based Atco Frontec: "Defence is the fastest-growing part of our business.

With the exception of 25 or 30 firms, most of the 500 or so Canadian companies that sell to the military are "dual-use" vendors, supplying both civilian and military customers.

But like MDA and Atco Frontec, many are earning a rising percentage of their revenue from the defence side.

According to data provided by the industry lobby, the Canadian Association of Defence and Security Industries (CADSI), the nation's defence sector employs 70,000 Canadians and generates $7 billion in annual revenues.

About 50 per cent of those revenues come from international sales, which have been growing at an annual rate of 15 per cent.

Moreover, an increasing number of military suppliers are producing sophisticated products and services as part of Canada's high-tech economy.

A leading example is U.S.-owned General Dynamics Canada (GDC), the nation's largest defence systems integrator. GDC has operations in Ottawa, Calgary, Halifax and Canberra, Australia.

Like a rising number of Canadian suppliers, it is concerned less with producing "platforms" than with making sure those platforms communicate with one another.

GDC is responsible for systems integration on the 28 Sikorsky H-92 maritime patrol helicopters, which the previous Liberal government ordered in 2004 to replace the navy's aging fleet of Sea Kings.

GDC procures sonar, radar, acoustic and other sensors, then runs the signals received from them through a centralized computer, or mission data management system.

Delivery of the first chopper will be early in 2009, with the rest to follow at a rate of one per month thereafter.

The H-92 helicopter project has meant an additional 250 jobs, pushing GDC employment in Canada to 2,100.

"Revenue has grown steadily over the past five years, just under 10 per cent in aggregate," says president John Watts.

Meanwhile, GDC's sister company, General Dynamics Land Systems- Canada (GDLS-C) is providing the light armoured reconnaissance vehicles (LAV) for the Canadian Forces in Afghanistan.

While GDLS-C built the LAVs, GDC supplied surveillance systems that were integrated into the vehicle chassis. In November, GDLS-C opened a facility in Edmonton to repair and retrofit the vehicles.

"The anchor for our business has been and will continue to be the Canadian Forces," says Sridhar Sridharan, senior vice-president of General Dynamics Land Systems-Canada.

However, the company is also pursuing export markets.

In March, it won a contract to supply 20 mine-resistant, ambush-protected (MRAP) vehicles to the U.S. Marine Corps. The order could eventually rise to 4,100 vehicles. The company provided 75 MRAP vehicles to the Canadian Forces in 2005-06.

It's common for Canadian defence firms to use DND contracts as the basis for developing products and services that can then be sold to foreign military customers.

Atco Frontec, for example, developed valuable expertise during 2000-03 providing support services for 1,500 Canadian Forces personnel deployed in Bosnia. That know-how soon led to more opportunities for the company in the upkeep of military camps.

"Most clients look for experience and credentials in awarding clients," says Michael Gervais. "Most of these projects are labour-intensive and we had developed a cadre of experienced people."

Now, the company provides what Gervais calls "a menu of support services" - anything from equipment maintenance and catering to information systems support - and has won contracts to serve the NATO Stabilization Force in Bosnia, the Swedish Armed Forces in Kosovo and the NATO deployment at the Kabul International Airport.

"Over the last two to three years, defence has been a significant growth vehicle for Atco Frontec," adds Gervais. "Revenue growth has been around 15 per cent year over year."

Winnipeg-based Bristol Aerospace (a division of Canadian-owned Magellan Aerospace Corp.) is also keeping its workforce of 700 busy.

It is beginning delivery of key components on the airframe, engine and vertical-lift assemblies for the F-35B, also known as the Joint Strike Fighter. This is the world's first multi-role fighter, a nine-nation program with Lockheed Martin as prime contractor.

"It's the largest program ever for a fighter aircraft," says Bill Matthews, Magellan's vice- president of marketing. "We are about two-thirds of the way through identifying $2 billion worth of participation."

He says Magellan will be involved throughout the 25-35 years of production.

Bristol continues to manufacture the CRV7 air-to-ground rocket, which it has sold to a dozen western or western-friendly air forces. "We're now developing precision guidance systems for it," says Matthews. "You'll be able to fire fewer, but more accurately - to reduce collateral damage."

Bristol continues production of its Wire Strike Protection System for helicopters, which cuts wires that they might strike when flying close to the ground.

There are more than 16,000 such devices installed on helicopters around the world, and they will be incorporated into the Sikorsky H-92s being readied for the Canadian Forces.

Over the last seven years, says Matthews, Magellan's revenues have been 35 per cent defence-related and 65 per cent civilian-related. "We may go up five per cent to 10 per cent on the defence side during the Joint Strike Fighter's high production rates."

There will be more white-collar jobs, such as program management and supply-base management, he says, but offset by less blue-collar employment.

At MacDonald, Dettwiler and Associates, "Defence is relatively new compared to other markets we've been in," says Lee Carson.

Yet, in the firm's land-based information systems division, military clients now account for 70 per cent of revenue.

The firm has recently captured two key foreign projects. It is providing a Maritime Composite Training System for the Royal Navy's Type 45 destroyers. This is similar to the naval combat operator trainers that MDA has provided to the Canadian navy to conduct basic training of its seamen for operations-room equipment on all its ships.

"It uses commercial-grade hardware to emulate shipboard hardware," says Carson. "It's less expensive and the software emulation is easier to reconfigure."

For the U.S. Air Force, MDA is providing a version of the Maritime Command Operational Information Network (MCOIN III) that it delivered to the Canadian navy.

The system displays information on a screen showing which vessels are sailing in Canadian waters and what their trajectories are. MDA installs an integrated package that includes the screens, system architecture and software.

"The pattern is the same," says Carson. "We develop systems first for DND, then try to export them. Everybody's requirements are a little bit different."

Looking ahead, MDA hopes to be a key player in the $2.9-billion joint support ship project for the Canadian navy.

The JSS project will deliver three multi-role vessels. In addition to being able to provide at-sea refuelling and resupply to deployed naval task groups, they will also be capable of sealift operations and support to forces deployed ashore.

Two rival consortia have each received a $12.5-million contract for the project definition phase. Based on these plans, one team will be selected, with delivery of the first ship targeted for 2012.

MDA is part of a consortium led by Germany's Thyssen- Krupp Marine Systems. "They're a world-class exporter of warships," says Carson, "and we hope to translate the partnership in JSS into a long-term partnership."

Also hoping for a piece of the JSS project is B.C.-based Victoria Shipyards Co. Ltd. (VSL), which is part of the rival consortium led by SNC Lavalin.

VSL is currently working on an $83-million contract for the construction of eight training vessels to be used for basic training for the Canadian navy. Two of the vessels have been delivered and the remainder will be completed in 2008.

VSL is also doing overhaul work in Victoria for the Canadian navy's frigate HMCS Winnipeg and submarine HMCS Victoria.

L-3 Communications Electronic Systems Inc. (L-3 ES) is also eyeing the JSS competition with more than passing interest.

It's part of the Thyssen-Krupp-led consortium, hoping to provide in-service support of the electronics onboard the ship.

The company also anticipates offset work from the transport plane program.

One DND order is for strategic airlift: Four C-17 Globemasters from Boeing, for delivery by the end of August. The planes can carry tanks, soldiers and large equipment around the world without stopping. The other order is for 17 tactical transport aircraft. Lockheed Martin's C-130J is favoured to win the bid.

L-3 ES is a "preferred supplier" to both Lockheed Martin and Boeing. "Direct content (for the two airlift programs) will be relatively small," says Ackerman. "Both companies are now polling and determining the capability of Canadian companies (for offset contracts)."

L-3 ES is under contract to Boeing to produce cockpit displays for F-18s as part of an upgrade by the Canadian and Australian air forces. The $100-million order will run into 2009. The U.S. Marines have also ordered new displays and eventually all its F-18 aircraft will be equipped with them - a program worth more than $30 million to L-3 ES.

L-3 ES and a sister company were selected last October to provide a mobility and suspension system for the U.S. Army's proposed new manned ground vehicles.

L-3 ES will lead the electronics, software and simulation work. The system development and demonstration phase is to run through 2010. L-3 ES's portion of the contract is worth US$10-$15 million.

Despite the good times for many defence contractors, the rising re-equipment tide hasn't lifted all boats. Luxell Technologies Inc. of Mississauga, Ont,. filed a proposal under the Bankruptcy and Insolvency Act last August to keep its creditors at bay.

The firm, which makes flat-panel displays for the defence and avionics industries, hired new top executives after "past management couldn't bring anything to conclusion," says spokesman Simon Dann.

Luxell will shortly issue its first-quarter results under its new management, but the new CFO "will only 'own' the third quarter," says Dann.

The market for heavy-duty display panels is growing, but he concedes that Luxell's new team has won no major new contracts, only repeat business from existing clients.

Even for the defence suppliers that are flourishing, there is an uneasy sense of a glass half-empty. The Harper rearmament program "will be positive to a degree," says Watts, Canadian Association of Defence and Security Industries chairman.

"Will it be as positive as it could have been? I'm not sure. Several of these requirements are coming from (abroad). Obviously, the opportunity for Canadian industry is somewhat less. For $15 billion, I don't think there's going to be a huge impact on Canadian industry."

CADSI insists that Canada, which currently devotes 1.1 per cent of GDP to the military budget, should boost that figure to the European NATO average of 1.6 per cent.

"I don't think it's just a matter of reaching a particular number, " says Watts. "It has to be strategically driven."

(Sheldon Gordon can be reached at gordon@businessedge.ca)