Thank you very much for allowing me to speak today.
A key part of understanding the defence industrial base today is that it is a product of over five decades of inattention to the actual defence needs of Canada. Like the Canadian Armed Forces, it is not ready to meet the threat environment we face today.
This brings me to a critical point, one that I'm going to return to several times: The defence industrial strategy must be subservient to the defence policy of the country, not the other way around. That is the essential element that has been missing, to an increasing degree, since the 1960s. The disconnect between Canada's defence needs and the resources allocated to meet them has had deleterious consequences for the defence industrial base. Defence firms lost a stable demand signal and the funding that would make it fit for the defence needs of the country.
The consequences of this failure have been clear. First, you see a boom-bust cycle in many of the defence sectors. It was most pronounced in shipbuilding. Many firms exited the defence market entirely or failed to modernize their production systems; others looked to foreign markets for revenue. Roughly half of the defence industrial activity in this country is export-related today. Of that, a further 60% is accounted to the United States due to existing defence production agreements, as well as the U.S. being a very large and stable market.
As a general trend, firms have specialized into subcomponent system suppliers and not finished systems. These are some of Canada's leading defence firms in terms of innovation and market position, but they are not well positioned to meet Canada's own defence needs. In some respects, Canada has highly globalized defence industries, and we need to protect that.
Going forward, this government has made some good initial steps, but pitfalls abound. I know there has been a strong desire to develop greater sovereign capabilities, yet the military capability development trends have been in the opposite direction, towards closer integration through battlefield networking and data-processing systems. Decision-making times are being compressed into milliseconds, and delays will result in lost battles and lost lives.
I understand the political moment Canada is in with regard to our southern neighbour today, but we must be careful not to overshoot that mark. We are deeply integrated into both their military systems and their supply chains.
As an observation, there is no viable path to become a defence industrial autarky. Our defence needs are vast. We need to pick and choose carefully what we invest in. Trying to chart a too-independent path can come at exorbitant costs, damage our industrial base's competitiveness and, most critically, result in a much less effective Canadian military.
Nevertheless, there are areas where Canadian firms have comparative advantages, and those should be exploited. Joining allied programs through the insertion of Canadian investments and industries can be a viable path, but we must be careful. Many of our allies operate highly protectionist and inefficient defence industrial bases. Despite their competitiveness, Canadian industries will find it difficult to make headway in these markets.
This leads to another key point. If the government wants to provide greater market opportunities for our defence industrial base, it must enter into development programs early and be willing to take calculated risks, with the acknowledgement there will be failures. The recent changes to the national security exemptions are good first steps in this path, but more must be done.
Relatedly, I also think we need a vast overhaul of our intellectual property regime, which perhaps is a key tool that Canada can use to improve its defence industrial base performance. We need to be flexible, realizing when to obtain IP, develop it or forgo it. That's a level of sophistication that the government needs to develop further.
Furthermore, our defence innovation system is largely broken and in desperate need of overhaul, over and above what is currently envisaged. I understand that we are in early days of this government's efforts to reform this space, but the challenges here are immense and deeply rooted. It is critical to get this right.
Our peer competitors have many advantages, but none is more clear than their ability to outproduce our own defence industries. Thus, innovation is widely seen as one of the key enablers for allied states to maintain a military edge. Rapid technological adaptation and change to meet a highly dynamic and lethal battlefield have become the defining features of emerging military systems. However, Canada and its defence industries lag far behind our peers in this regard. Our investment amounts are far too limited, even with the recent budget announcements, and there's no real pathway to get new technologies into the hands of Canadian Forces personnel. In other countries, this is often referred to as the valley of death. In Canada, it's become a chasm.
The military services even bypass the government's innovation pathways, redirecting funding from other budget streams to develop and acquire the systems they see as vitally necessary. The system must be much more flexible in order to harness defence industrial productive capacities.
Finally, there's a timeline discrepancy that we must acknowledge.
As I noted earlier, we have an immediate need to address the major capability gaps that currently exist; however, the development of the Canadian defence industrial base will be hard pressed to meet some of these needs. Development will be a decades-long process. We need to acknowledge that and follow a two-pronged strategy to address both issues. Canada needs to acquire capabilities now, but also pursue longer-term industrial development where it is warranted. Trying to proverbially hit two birds with one stone will almost certainly result in missing both.
I'll leave it at that. Thank you very much.