Mr. Chair, honourable members, ladies and gentlemen, thank you for inviting me to speak to you today to give you a Canadian defence industry perspective on manufacturing.
The basic message that I would like to leave you with is that the Canadian defence industry is a vital, innovative part of Canadian manufacturing that the federal government should be paying more attention to, especially at this point in time.
In the context of a Canadian manufacturing sector that's lost, to our knowledge, at least 400,000 jobs in the past decade due to fierce offshore competition, the size of Canada's defence industry has remained relatively stable.
This points to some resiliency in the industry, which is somewhat rare in the manufacturing sector. More importantly, it shows that the defence industry can grow considerably in one generation if the federal government makes the right choices and works in partnership with it.
By this I mean the growth potential for defence manufacturing is highly sensitive to federal government actions or inaction. Federal government policies and programs, especially procurement decisions, influence heavily, if not determine outright, our sector's growth path. I don't think you can say that about any other part of Canadian manufacturing.
To begin with, I'd like to give you a few numbers from a recent Innovation, Science and Economic Development and Statistics Canada survey of the defence sector to provide a high-level picture of what our industry looks like.
Of particular relevance to your committee's work is the fact that over 60% of the Canadian defence industry is manufacturing-focused. The Canadian defence sector accounts for over 63,000 direct, indirect, and induced jobs and generates $6.7 billion in gross domestic product annually.
The sector is export-intensive, with 60% of industry revenues coming from foreign sales. I hasten to add that this strong export performance takes place in a context of a highly protected and regulated international marketplace for defence goods and services. This is one of the reasons defence goods and services are exempt from the provisions of the WTO and NAFTA and other international trade agreements.
Almost all countries protect, promote, develop, subsidize, and favour their domestic defence industries for a combination of national security, sovereignty, and economic reasons. It's a reality that we need to understand.
As a result, when Canadian defence firms compete abroad, we're up against some formidable and often unpredictable forces, and yet those export numbers tell us that our companies do very well. I would suggest to you that our export success is a measure of our industry's innovative nature and the value for money that it provides, and that it is a barometer of the high-quality goods that Canadian defence firms sell into global markets.
Another special feature of the defence market is that, nationally, there is really only one client: the Government of Canada in general, and National Defence and the Canadian Armed Forces in particular. This is not the way the ideal free market is described in economics 101, where there are many buyers and sellers.
The ISED-StatsCan survey found that companies in our sector pay 60% above the average manufacturing industry wage. This is explained in part because our industry is innovative. Truly innovative firms have highly qualified and well-paid people working in them. Over 30% of the occupations in our industry consist of engineers, scientists, researchers, technicians, and technologists, and another 40% of our workforce are well-paid production workers.
That gives you a high-level picture of our industry. Now let me give you a little ground truth on the sector.
The Canadian defence sector comprises about 650 small, medium, and large firms. Some are Canadian and some are foreign. It's truly a pan-Canadian industry, with pockets of industrial strength in every region of Canada.
Shipbuilding and the associated marine industry are located on both coasts. Military aircraft maintenance, repair, and overhaul services and aircraft fabrication and structures are based in Nova Scotia, Quebec, and western Canada. In Ontario there are combat vehicles and related maintenance, repair, and overhaul, as well as airborne communications, navigation, information systems, software, and electronics.
It's also worth pointing out that two-thirds of Canadian defence firms have significant commercial non-defence business operations. Furthermore, a lot of defence products and services end up generating important commercial and civil technologies with spillovers into the broader economy.
That's the essence of the sector.
Today, the opportunity of a generation stares our industry and the Government of Canada in the face. Over the next 20 years, the Canadian defence manufacturing base has the potential to grow significantly due to the planned recapitalization of the Canadian Armed Forces. Shipbuilding and the fighter jet replacement program are the two largest pieces of this puzzle, financially speaking, accounting for at least $35 billion in capital equipment.
The Defence Acquisition Guide, the Canadian Armed Forces' 20-year plan, lists over 200 major initiatives. This is a huge opportunity, unprecedented in fact, to leverage defence assets in order to spur growth in the defence manufacturing base in Canada.
The leveraging of defence procurement was one of the key elements of the report produced by the expert panel chaired by Tom Jenkins. I was a member of that panel.
But how do we execute on this opportunity? I'd suggest to you that there are two key ingredients needed to grow defence manufacturing in this country.
First, we need to recognize that Canadian prime contractors, of which there are not that many, must be considered more strategically by the government in procurement strategies for these major capital projects. Domestically based primes are the firms that do the bulk of manufacturing in our sector. They own the intellectual property, which is essential to getting the kind of innovative, sustainable manufacturing activity and high-wage employment that we all want. The kind of advanced manufacturing we're talking about here is founded on intellectual property, research and development activities, design, and testing. It also includes complex systems integration of both hardware and software.
Second, we need to find ways to incentivize intellectual property transfer from foreign primes into Canadian firms so that those Canadian companies will also be able to engage in the kind of innovative manufacturing that comes with owning and exploiting intellectual property. Procurement strategies need to do more than just drive Canadian firms into supply chains, and the value of the supply chains needs to be better defined up front. We need to recognize that because the Canadian Armed Forces buy equipment so infrequently and purchase so few units, supply chain activity that is limited only to the domestic buy will not sustain the industry, let alone grow it. At a minimum, when foreign primes win Canadian contracts, Canadian firms need to be driven into the global supply chain of those foreign primes.
But we need to think bigger and more strategically than the existing suite of fragmented programs scattered amongst two or three departments, with little coherent direction. What we really need to do is develop a made-in-Canada defence industrial policy, tailored to our unique security requirements and domestic industrial capabilities. Virtually all of our allies have something called or resembling a defence industrial policy. Canada needs alignment at the political level to drive strategic thinking into defence procurement projects, using the tools we have to achieve the outcomes we want.
The moment to fix this policy gap and grow defence manufacturing is now. The government has simultaneously launched both a defence review and an innovation agenda. These two policy reviews need to be joined up to develop a Canadian defence industrial policy to build a stronger, larger, and more innovative Canadian defence manufacturing base.
The vision is ambitious, yet it is achievable. The time to act is now. Industry is ready to work with government on this. The Canadian defence industry recommends that this committee, in its report to government on the manufacturing sector, echo our call to develop a made-in-Canada defence industrial policy tailored to Canada's unique security challenges and economic opportunities.
I'd like to thank you all once again for the opportunity to appear before your committee today.