Mr. Chair, thank you. I will attempt to follow good advice that I was once given about attending these things, which is to be bright, be brief, and be gone. I will attempt to do that. Maybe I'll just have to speak a little quickly.
I want to start with two statements, which I'll just put out there for the committee to think about while I'm pursuing the rest of my remarks. The first is that innovation is prosperity from creativity. The second is the statement that both product innovation and process innovation are critical for economic development. With those initial thoughts, I'll take you for a brief jog through the aerospace sector, both domestically and globally, to put the rest of my comments in context.
You have, as material we submitted, the state of the industry report. If you want to know the great and gory numerical details of the sector, feel free to refer to it.
The points I want to make about the aerospace sector are, first, that the Canadian aerospace sector is a very R and D intensive sector, spending five times more on R and D than the Canadian manufacturing average; second, that the sector is first in the OECD in productivity, with productivity growth two to two and a half times the Canadian manufacturing average; and third, that the aerospace sector is highly export-oriented—about 80% of our products leave Canada. Those exports are pretty diverse. Whereas the Canadian average is to send about 80% of our products to the United States, aerospace sends less than 60% to the United States. Also, it may surprise some members to learn that more than 60% of those exports are actually supply-chain oriented. In other words, they're not whole airplanes; they're parts of airplanes.
The net result of all of this is that the aerospace sector is, and must remain, a globally competitive sector. We are connected to the global market, and we cannot possibly be disconnected from it. A few words are in order about the nature of the global market dynamics that Canadian companies operate in.
The good news is that the global sector is enjoying very strong demand. This has led to large long-term backlogs at major manufacturers. Something like 10,000 aircraft are currently on order at major OEMs. However, some particular market dynamics, related to the coincident introduction of competing aircraft designs, have led to a lot of cost pressure, because the major OEMs have all been concerned about retaining market share. This means that those major customers of our supply chain suppliers need efficiency in the supply chain. They have effectively sold every airplane they're going to build for the next five, six, seven years, and they've sold them at prices that are very aggressive. Their trend is to rationalize their supply chains, which means fewer, more efficient suppliers. Suppliers are thus under a lot of pressure to reduce price and add capacity so that the good suppliers can replace the less efficient ones.
This generates an atmosphere that is not for the faint of heart. In this atmosphere, suppliers that are very good at what they do enjoy a great deal of opportunities. It's highly competitive, and just because you're a supplier today doesn't mean you will remain one if someone is better than you are tomorrow. It's in this environment that we need to talk about the question of innovation, and the role it plays in keeping those companies part of the global supply chain of this growing global market.
I want to talk about innovation in terms of three kinds of innovation, which is how I break it up. This is very much based not only on the position I occupy now, but on my history of having been first the director of R and D and then the president and CEO of a small aerospace company. This is a dream that I have lived personally.
The first kind of innovation I would refer to is what I would call entrepreneurial innovation. This is probably the kind of innovation that most of us think of when we think of innovative economies. These are small companies that are driven by investment and are developing a new product offering. This is essentially what we think of as an innovative company. At the other end of the scale—and there are many players like this in aerospace—are the large companies with sophisticated R and D divisions that are constantly developing and refining their products to compete in a global market. This is also product innovation. I would also refer to it as balance sheet innovation, because essentially these companies are capitalizing their R and D, and they're doing it on the strength of their balance sheets. That's why they can spend the kind of money they do.
The third kind of innovation actually occurs in the middle of the industry. These are companies that are far less interested in building better mousetraps and more concerned with building mousetraps better. They do this by adopting new techniques for manufacturing, integrating new manufacturing technology, increasingly exploiting big data applications or the Internet of things to find efficiency, including in their business and management practices. This is why I call this “process” innovation. According to the definition that I said at the beginning, this is still very much innovation. This is good ideas. This is creativity that is being used to generate prosperity, being used to generate higher profits, higher margins, and more competitive businesses, but it may not be the kind of innovation that everybody thinks of when they think of innovation. But because of the market dynamics that I described earlier, this is exactly the kind of innovation that we need to be supportive of in Canada if we're going to have the engine, at least, of our aerospace sector be successful. The companies that need to grow to take advantage of the global demand are companies that are going to have to solve the problem of how to be process innovators.
What does this mean in the context of the question that you're trying to answer? I think the reason that it's important is because the companies that are going to consume the government programs that support process innovation have some fundamental characteristics in common, and I think these are common across many sectors, not just aerospace. The first is that they are cash-flow limited and cash-flow focused. To put it bluntly, these are guys who get out of bed every morning wondering how they're going to pay about a hundred different mortgages this month because that's how many people work for them. They're putting two dozen people through university and a half a dozen kids need braces. That's their concern every month: finding the cash to pay for all of that economic development. They don't have a lot of extra money to invest, they don't typically have strong balance sheets, and they do have a very intimate relationship with their banker, probably. They also have relatively very few staff dedicated to R and D or, in fact, any specialized activity, and the resources they do have who do that are extremely precious to them. They're usually their very high-value individuals. There aren't very many of them, and they know exactly what they're doing every day because they have seven jobs they'd like them to do that they can't be doing. These are also very pragmatic people who are not going to apply those resources where they don't think they're going to have a large amount of effect. Activities that would fall under the category of not having a large amount of effect are activities like preparing applications, reporting; meetings or other non-productive work would definitely fall into the category of not the kind of work you want high-value resources to be doing.
When we design programs that support this kind of innovation, it's not even so much important that they be directed at process innovation. They need to be directed at the kinds of companies that are doing process innovation, which means we need to be very careful of the impact that they have on cash flow. We need to be careful that they do not depend on balance sheet strength in order to be able to qualify. We need to make sure they do not require a large commitment of specialized resources, especially those kinds of tasks that are not going to be seen as productive, including a large amount of reporting to the government or to customers. We also need to understand that everybody in this business is going to need to adapt those programs to their business reality on the ground. The programs need to be flexible and need to take into account that, by and large, the people who will be dealing with this program are extremely successful businessmen. In our industry they wouldn't be in business if they were not. They know how to run their business. They need help staying competitive, but they do know what they're doing running their business. It would be better for us to adapt to their reality than to expect them to adapt to ours.
I started with two statements. The first is that innovation is creating prosperity from creativity, and I think that I've explained that. Creativity without the prosperity is not economic development. True innovation means we have to take those great ideas, which Canadians are, frankly, excellent at generating, and we have to find a way to generate profits and prosperity from them, which, frankly, we're not as good at doing. Our industry, I would say, has been a leader in being able to do that, but we are in a very particular time, in a very competitive global environment, and we need to continue to adapt the way we support companies to allow them to continue to do that.
That brings me to the second point I started, which is that both product innovation and process innovation are important. We have ample examples in aerospace of product innovation and how that is taking on the world, keeping Canadians prosperous, and returning value to the country. It is also important not to forget in your deliberations that process innovation, while not as obvious and maybe not as sexy, is just as important to what I consider to be the economic engine of our industry.
To make this work, we have to ensure that we have a more competitive and innovative aerospace industry that will lead to a more prosperous Canada and more jobs for Canadians. These are questions that we, at the Aerospace Industries Association, are considering very carefully. We are encouraged that you are as well, because they are important.
Finding the right answers will be critical to ensuring that Canada has an economy that is not only dynamic and creative, but also prosperous and innovative.
Thank you.