National Defence Committee on Dec. 9th, 2010

[The Chair, Conservative, Maxime Bernier]

Good afternoon, everyone. We are now starting the 39th session of the Standing Committee on National Defence.

According to the agenda, pursuant to Standing Order 108(2), we are continuing the study on the next generation of fighter aircraft.

I thank the witnesses for being here and would like to welcome them.

Testifying today are industry representatives Mr. Gilles Labbé, who is the President and Chief Executive Officer, Corporate, of Héroux-Devtek Inc., and Mr. Maurice Guitton, who is President and Chief Executive Officer, Canadian Sales Office, of Composites Atlantic Ltd. Welcome to the committee.

And from Handling Specialty Manufacturing Limited we have Thomas Beach, president.

We will start with Mr. Labbé, from Héroux-Devtek. You have ten minutes.

I want to inform the members that Mr. Labbé will have to quit at five o'clock. If you have questions for Gilles Labbé, please ask him before five o'clock.

Mr. Labbé, you have 10 minutes.

[Gilles Labbé, President and Chief Executive Officer, Héroux-Devtek Inc.]

Thank you, Mr. Chair.

Ladies and gentlemen, I would like to thank you for inviting me to testify today. I would also like to thank you for your dedication to issues relating to national defence and the Canadian aerospace industry.

Héroux-Devtek is a public corporation founded in 1942. The company's head office is in Longueuil. We have plants in Longueuil, Laval and Saint Hubert, Quebec; Kitchener and Toronto, Ontario; Arlington, Texas, and Cincinnati, Springfield and Cleveland, Ohio. In Canada, we have over 1,000 employees working at our aerospace plants.

Héroux-Devtek is the third largest designer and manufacturer of landing gear in the world and a leader in the manufacture of commercial and military airframe components. Over 65% of our products are exported, which makes us a global leader that can compete for and secure contracts for projects around the world.

Héroux-Devtek's growth speaks for itself. Our revenues increased from $12 million in 1985 to over $320 million in 2010. We are very proud of our achievements. We got there through hard work and calculated risks, but above all through the exceptional skill of our employees.

Héroux-Devtek enthusiastically supports the Government of Canada's decision to purchase the F-35 joint strike fighters. This program, based on a partnership among nine nations that originated in 1997, will give Canadian companies access to opportunities in the partners' fleet valued at up to around $12 billion, excluding the maintenance of the aircraft.

The Government of Canada's involvement in the concept development and demonstration phases of the F-35 makes this an outstanding opportunity for the Canadian aerospace industry. Indeed, our early involvement in the development of state-of-the-art systems and components for the F-35 places our industry in a prime position to win substantial manufacturing contracts for the partner nation fleets of 3,200 aircraft and for the aircrafts sold to non-partner nations.

Note that the F-35 will likely be the replacement product for the F-18, A-10, F-15, and F-16, among other aircraft.

Canada's involvement in this program will bring value-added work to our country and generate the creation of thousands of jobs in the aerospace industry across the nation. Moreover, the large scope of this project would help us generate considerable economies of scale. Now is the time to integrate the supply chain and make the most of this extraordinary opportunity. Two years from now will be too late.

Héroux-Devtek's involvement with the joint strike fighter comprises several levels. We build components of the landing gear and aerostructure, such as the wings and the centre fuselage. The uplock system has been conceived and developed by our engineers in Longueuil, and we are proud to be one of the largest aerostructure suppliers in this program.

The contracts signed with Lockheed Martin and the other prime contractors will allow us to develop new technologies and bring our production process to the next level. This in turn will help us to remain competitive by pushing the limits of our capabilities to innovate. Moreover, this production will likely span more then 25 years, and the in-service supports will be required until 2051.

The majority of Héroux-Devtek's factories are engaged in production related to the F-35. Our participation in the joint strike fighter supply chain will help us demonstrate our capabilities across the world. We will also be in a position to leverage the technology developed and the knowledge acquired in the JSF context to other civil and military platforms. This program will therefore also have a considerable multiplier effect for a company like ours.

The choice of the F-35 Lightning II joint strike fighter to replace the CF-18s has been the focus of a lot of attention lately. I would like to outline a few points of clarification that I feel are needed in order to have an informed debate on this decision.

Firstly, Canada could not reap all the benefits of this program if it were to withdraw from the JSF partnership and choose not to purchase the F-35s. As an industry leader, I can assure you that if we don't buy the F-35 we will not get the benefits linked to industrial participation to which I was referring earlier. Those benefits, arising out of concerted and efficient efforts from government and industry over the past ten years, would go to partner nations acquiring the joint strike fighter.

Secondly, the value of the benefits received from industrial participation differ from those Canada would receive from a conventional industrial and regional benefit, or IRB. We're very pleased with the changes brought to the IRB policy by Minister Clement, but early involvement in a large program like that of the JSF is likely to bring considerably higher value-added work to Canadian companies such as Héroux-Devtek.

Moreover, only the costs related to the aircraft would generate IRBs. Those costs represent approximately $4.8 billion, not $9 billion, and we are in a position to bid on opportunities worth $12 billion on the partner fleets of 3,200 aircraft, excluding the maintenance and aircraft purchased by non-partner nations.

Finally, as I mentioned earlier, Canadian companies only have a window of opportunity of approximately two years to integrate the F-35 supply chain. Indeed, once the high rate of production scheduled to start in 2014 begins, the suppliers, both first and second source, will have been selected, and it will be too late for Canada to return to the table. Time is of the essence.

To conclude, as the chairman of the Aéro Montréal board of directors, and a member of the AIAC board of directors, allow me to reiterate some facts about our aerospace industry.

Canada ranks fifth in the world in aerospace production, and Montreal is the third largest aerospace centre worldwide. The industry is present in all regions in Canada. Our capacities for engineering and production are envied the world over. Not only are our companies able to compete, but they want to compete. We have invested a great deal to be able to win these contracts. We need a climate of stability to optimize the benefits of this decision for the industry, from one end of the country to the other.

Thank you for your attention.

[The Chair, Conservative, Maxime Bernier]

Thank you, Mr. Labbé.

I will now give the floor to Mr. Beach.

[Thomas Beach, President, Handling Specialty Manufacturing Ltd.]

Thank you very much. I appreciate the opportunity to come before the committee to tell you the story that has unfolded with Handling Specialty and Lockheed Martin Aeronautics under the F-35 program.

In short, Handling Specialty is an engineering and manufacturing company. We are classified as what is called an SME--that's a small-to-medium enterprise--where our annualized revenue stream varies somewhere between $12 million and $17 million a year. We're located between Niagara Falls and Hamilton, Ontario, on the Niagara Peninsula.

Our story with the J-35 begins with one of the subcontracted engineering firms out of Chicago, McClier Corporation, which contacted us in 2002. McClier was under contract to develop a number of lean initiatives and processes to help Lockheed Martin reach their objectives, which was to reduce the throughput time in the manufacturing of their aircraft and reduce cost.

Handling Specialty has spent a lot of time in many different markets. In the nineties we specialized in the automotive industry, where throughput time, lean initiatives, mean time between failures, and techniques were an everyday part of our business. We demonstrated this to McClier Corporation. The aerospace industry has begun to gravitate its manufacturing processes over towards the automotive types, as there are some similarities between them as they try to keep the process lines moving on a continuous basis. This excited McClier. We spent about six months investing in specification writing, drawings, conceptualization, which stimulated the interest of Lockheed Martin.

In the year 2003 we made our first presentation to the process engineering group at Lockheed Martin in Fort Worth, Texas. We were called back immediately for a second visit, and shortly thereafter we began to make proposals in rough order of magnitude budget quoting, which led to our first contract in March 2003 for $4 million.

Simply stated, our deliverables are what are called VWACs, vertical wing assembly cells. They are very large lifting structures that elevate tools, IT, and humans so that they may safety and efficiently work around the aircraft wing in its vertical orientation. It's a very large aircraft wing. It could be very dangerous, so the idea of keeping them very safe and having them work up and down with the wing assembly safely was paramount.

The first phase that we got involved in with Lockheed Martin was called SDD, system design and development. It's basically what we call “concurrent engineering”, where you're trying to develop a process and a product simultaneously. This led to a number of change orders. Our initial purchase order of $4 million grew to $8 million in summer 2003. As we moved into 2004, we began to install these systems, where we put staff in residency at Lockheed Martin in Fort Worth. Little did we know they would still be there five years later. Amidst the installation, they came to us with another challenge, where they must take the wing assembly from a vertical orientation and transpose it to a horizontal orientation without damage. This is a very risky manoeuvre because of the centre of gravity in the wing--a very critical piece is the wing--and Handling Specialty was contracted to design, manufacture, and install wing assembly dollies. This led to an additional $1.5 million worth of business for us.

In the year 2005 the J-35 design actually took a hit when they realized that they needed to take some weight out of the aircraft and yet maintain fuel capacity. They looked to the wing and they changed the profile of the wing. As a consequence, all the equipment delivered to date by Handling Specialty had to be remodified. We exercised an additional $2.5 million worth of rework on site in order to match the profile to the new wing.

In 2006 we were invited to Rome, Italy, to participate in the global industry team forum. This is a forum attended by over 100 executives, all in the supply chain of the joint strike fighter program. As an SME, we were humbled to be sitting amidst the likes of BAE Systems, Northrop Grumman, Pratt & Whitney, and such, but it was through the relationships that we were building with Lockheed Martin that we would be invited to meetings involving people who would end up being potential customers and clients of Handling Specialty. In actual fact, Mr. Labbé is one of our target customers as a result of the joint strike fighter.

We were able to have meetings with Alenia Aeronautica. This is a company in Torino, Italy, that is currently set up to mirror the process lines for manufacturing wing assemblies. We have continuous communication with Ercole Strada, who is the head of military aircraft for Alenia. We are hoping to see some excellent revenue streams out of the work they're doing over the next four years as they begin to build J-35 aircraft wings.

On September 25, 2006, we had an open house at Handling Specialty, and we invited our member of Parliament, Dean Allison. We invited our supply chain. This was attended by the head of the joint strike fighter program, a gentleman named Tom Burbage. I'm sure you're familiar with Tom. This is a special individual, who took the time to come visit with us and to shake the hands of every one of the 22 suppliers in our supply chain.

What I really appreciated was that Tom went to every one of the suppliers to pay his respects to them for what they've done. Handling Specialty is the prime contractor, but there are many Canadians and many small businesses similar to mine that are part of this program, that have relied on this program for many years, and that continue to look to us as a means of revenue income and sustainability.

In 2007 we received our second mass order for $10 million—more vertical wing assembly cells, as they began to head towards LRIP, low rate initial production. We installed through 2007, and in 2008 we were once again called upon to view a special application to insert workers into a dangerous void in the fuselage. They had a product made by a United States vendor that was unacceptable. Handling Speciality was doing engineering, manufacturing, and installation.

We've developed a nice relationship and a reputation for being the go-to people for custom-engineered solutions. We are small and flexible, and we are able to change direction when our customers find themselves challenged by some part of a mass manufacturing operation.

In 2009 the highest rate of production went to static platforms, overhead conveyor systems, which required ancillary support and lifting equipment. Handling Speciality was awarded over $750,000 in contracts as a subcontractor to OEM accounts, which took the prime contract with Lockheed Martin.

What is interesting about this is that the folks we're working with are from Michigan, and they're people who we dealt with through the nineties in the automotive industry. Thus, a group of material-handling and solution-based companies come together to create good solutions.

Dürr Automation is the company of choice that produced these overhead conveyor systems, and we are currently under contract with them in many other avenues.

I was fortunate to attend the True Patriot Love Foundation dinner three weeks ago with Steve O'Brien. He's the heir-apparent to Tom Burbage. Steve offered to provide us with any contacts we need in Alenia, in Torino, as we begin to build relationships over there.

In closing, I want to express how proud and how grateful we are to the joint strike fighter program. It has taken my small business and made us bigger and stronger. We are participating in programs with Goodrich Landing Gear, Pratt & Whitney aircraft, and with Rolls-Royce aircraft. The introductions that have been made were all courtesy of Tom Burbage and his team from Lockheed Martin. I don't believe my team would have been able to penetrate the aerospace defence industry without this relationship and without this program. As a matter of fact, I'm almost positive of that.

I have only a few numbers, but they are meaningful. In the seven years that we've been working with the joint strike fighter program, our total company revenues were $67.7 million. The revenue to the F-35/J-35 program is $23.4 million. This represents 35% of our revenue stream over the past six years. In 2004 and 2006 it represented 70% and 80% of our revenue stream, respectively. Those are large numbers.

To close, the manufacturing hours that we exhausted during our entire work with the J-35 amounted to 48,307 labour hours. To simplify that, it represents 23 man-years. For a small business like Handling Specialty Manufacturing, this is an enormous contribution.

Our future with Lockheed Martin is very strong. I speak with executive people at Lockheed Martin monthly about upcoming programs. We have proposals on the table right now with Lockheed Martin, and we are a very large supporter, an honest and genuine supporter, of the joint strike fighter.

Thank you for having me.

[The Chair, Conservative, Maxime Bernier]

Thank you very much, Mr. Beach.

I will now give the floor to Mr. Guitton.

You have 10 minutes.

[Maurice Guitton, President and Chief Executive Officer, Canadian Sales Office, Composites Atlantic Limited]

Thank you.

Mr. Chair,

ladies and gentlemen, I am pleased to be here today to participate with the Standing Committee on National Defence and to make a presentation on behalf of Composites Atlantic Limited.

Composites Atlantic Limited was established in Lunenburg, Nova Scotia, in 1987 to supply launching canisters to the ADATS program, the air defense anti-tank system contract. The company was created with the support of ACOA and the Province of Nova Scotia.

The company is owned by Sogerma, EADS Group, and the Province of Nova Scotia today, 50% each. It does state-of-the-art manufacturing of advanced composites. We address the world market and we're involved with all the OEMs of this world: Airbus, Augusta Westland, ATR, Boeing, Bombardier, de Havilland, Embraer, Lockheed Martin, Northrop Grumman, Dassault Falcon, Learjet, Cessna, MDA and the Canadian Space Agency, Short Brothers, and many small companies as well.

The company was started from ground zero. The building was erected in 12 months in 1988, manufacturing started in 1989, and the first parts were delivered at the end of the year. Since then the company has continued to grow and create both direct and many indirect jobs in the community. We are presently certified to the highest standard to manufacture advanced composites for defence, aeronautic, and commercial products. As a matter of fact, we are the largest company to produce advanced composites outside of the OEMs. In Canada we are the largest manufacturer.

We have offices in Kent, Washington, to address our customer Boeing and the west coast market. We have an office in Mirabel, Quebec, for engineering expertise and design and manufacturing of fibre placement parts in collaboration with the National Research Council. We also have representatives in Wichita, Kansas, and São Paulo, Brazil, and of course with Airbus and the people in Europe, in France and Germany.

The main plant is located in Lunenburg, Nova Scotia. We produce complex geometric parts using 24 different technologies under the same roof, giving great potential in the market to develop and produce better engineering products with better added value.

From our plant located in Lunenburg we have developed local suppliers: carpentry work for containers going worldwide to ship our products; transportation to go anywhere in North America, based in Lunenburg, Nova Scotia; a mechanical and machining company; sheet metal work; computer suppliers and software. For the past 20 years, over 100 indirect jobs are continuing to serve Composites Atlantic on a daily basis.

Today, Composites Atlantic employs 250 people with an annual revenue of C$42 million. Before the worldwide economic collapse we were close to 500 employees, with annual revenues of $50 million-plus. With the joint strike fighter and the Boeing 787, we will ramp up over 700 jobs over the next three to four years.

Concerning the joint strike fighter program, Composites Atlantic has been able to participate as a result of the government's long-term planning in the joint strike fighter F-35 program. This year, in 2010, we created ten jobs for the joint strike fighter for Northrop Grumman, for the U.S. portion of the contract. We are very pleased to start producing joint strike fighter advanced composite parts.

In the next ten years, if we had all the present orders we have and the next orders we are preparing our organization for, we would create 100 jobs in Nova Scotia, which would represent $71 million for the next ten years. In the next ten years after that, we will maintain those 100 jobs and will have a total of $167 million in contracts.

This will represent for the Lunenburg area, which is a small locality in Nova Scotia, over 1,600 jobs for the next 20 years.

We are supporting the program, which will bring added value to our company as well as advanced technology—as you all know, the joint strike fighter is definitely an advanced product—and long-term employment stability in a rural area to those who need more work to stay close to their families.

If it is possible, I would like to make a suggestion to this committee. If it is feasible for you, I will recommend that you come to visit us in Nova Scotia, and we will show you the chain of suppliers we have established in the Atlantic region—we would like very much to do that—including a training program which we have developed as well, from Lunenburg, from Composites Atlantic. This training program for composite technicians is being taught on a daily basis in the community to develop our business in the future and also our local suppliers.

I give my thanks to this committee for giving me the opportunity to be here today on behalf of my company and my staff to present our future with the joint strike fighter.

Thank you very much.

[The Chair, Conservative, Maxime Bernier]

Before we go on, I would like to say something.

I want to inform the members that at 5:05 we'll stop the questions to have a little discussion about our meeting for next Tuesday, if all agree with that.

Is that agreed? Okay.

I'll give the floor to Mr. Bryon Wilfert from the Parti libéral du Canada.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Thank you, Mr. Chairman. I appreciate going first.

I want first of all to congratulate these gentlemen. You are clearly a Canadian success story, and certainly as far as the official opposition is concerned we want to indicate that you can compete with the best in the world. We know that and we are very supportive of the work you do.

Mr. Guitton, you come from Lunenburg. You probably know a good friend of mine, Laurence Mawhinney.

[Maurice Guitton]

Yes.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

When you see Laurence, certainly say hello from me. He was an outstanding mayor for many years, and he put Lunenburg on the map.

[Maurice Guitton]

Thank you, and I will.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

As far as this issue is concerned, we have a concern with regard to the procurement process. We have no issue with regard to whether or not Canadian companies can compete. The government approach has been unusual, and we have consistently indicated that we want a fair, open, and transparent process. The issue has nothing to do with whether you can compete or not; we know that you can. You've already demonstrated in your comments today, gentlemen, that you in fact have been able to. I take your points about some of the companies you were with when you were overseas.

This is a general question, Mr. Chairman.

Has your company received any contracts or bid opportunities to date that are part of a standard industrial regional benefit program, wherein a 100% return is guaranteed to Canadian industry? And in your opinion, has your own organization and Canadian industry as a whole been well served to date by the current policy that IRBs be a requirement of government procurement?

This is to any of the gentlemen.

[Gilles Labbé]

If I may, I'll take this question.

In part of my speech I spoke about the IRB versus the way the F-35 has been structured. The way the IRB works, we can have 100% of the value of the contract. From what I understand, Canada will buy 65 airplanes, and the approximate cost of these airplanes is around $4.8 billion. So Canada will be entitled to get $4.8 billion of IRBs.

In the case of the JSF program, we have a chance here. It's a very rare moment to be able to join right at the beginning of a very large defence program. According to aerospace worldwide sources, this is the largest defence program for the next 25 years, and Canada has been able to join the program right away. Instead of building components or repairing components for 65 airplanes, here we have a chance, because we're competitive, to design and build products and service products not only for 65 airplanes but for a potential of more than 3,000 airplanes.

That's why I'm saying that while there is a potential for us in Canada to win approximately $12 billion of contracts for the Canadian aerospace industry, it's not guaranteed. But I'm confident that my company and many other Canadian companies can really demonstrate and win more business than for only 65 airplanes. That is, I think, the difference here.

[Thomas Beach]

The short answer to your question is yes, our business has participated in numerous contractual bids that are directly related to the 100% IRB contractual condition.

To elaborate on that, in actual fact it's one of our strongest initiatives at Handling Speciality. We don't build product that goes on an aircraft; we build big things that help people build big things. What is interesting and is a little bit different from what Mr. Labbé speaks to is that we really count on this program to learn of upcoming projects and potential revenue streams for our company, through Industry Canada and the people who are taking care of these IRB contracts. These are people we visit with every time we come to Ottawa.

This morning I was with Boeing. We've just recently put $1 million in Boeing in Everett, Washington, directly related to the IRB program. We lost two bids last year: one to Boeing Philadelphia—military—for the helicopter or rotary aircraft; and one at Lockheed Martin aeronautics. We have two more proposals, very similar, coming up in 2011, all of them founded on this program of the 100% IRB condition.

So my short answer, sir, is yes, we have been well served to date. I believe we will continue to be so, and I think it's an outstanding condition.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

I understand that even though there's no provision for delivery of IRBs in this particular procurement, I may take from your answer that obviously the current agreement with the JSF doesn't concern you and that even though the benefits would have a much lower risk if a 20-year IRB program were 100% guaranteed, you all believe you can compete regardless and that you would still come out ahead at the end.

Would that be a fair statement?

[Thomas Beach]

I believe that's a fair statement.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

What is the value of the current Canadian supplier-contracted production work resulting from the JSF selection? What production quantities do your contracts guarantee, if any? For example, how many chip sets, for what model of JSF aircraft, what would be the timeframe, and has Lockheed Martin discussed the implications for you for this work if the F-35 acquisition members continue to decrease in number, as we are seeing currently?

[Gilles Labbé]

Will you take this one, or...?

[Maurice Guitton]

Well, I'd like to take this one, but I'd like to go back a little bit on IRBs.

In the past, for many years, IRBs were attached to a program. We understand how the system has worked in the past. Today, the world is changing. There used to be IRBs also in commercial aircraft, but today it's a worldwide competition.

What I would like to say to this committee is that IRBs and commitment to a company are very nice, but you have too many examples in which in the past some companies had a contract with an IRB, and after the IRB was finished many companies went bankrupt.

The opportunity we have today, with no IRB really attached to the contract, is.... As Gilles has mentioned, many times in the past it was built to prints.

Do you understand my words, what “built to prints” means?

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Yes.

[Maurice Guitton]

You receive a package and you build exactly to specs and prints.

Well, today we have the opportunity, with our technology, our know-how, our intelligence, to be creative. We can do things; we can develop new ideas. As you said and as you know, today you have to be the best to win; there's no question.

There used to be a time, when there were IRBs, that you had five or six people bidding on the program in the country, and you would know one of them, and two of the guys would share the business. Today when you own those businesses, especially now that there are 15 countries bidding on this program, you're going to have hundreds of people in competition.

So you are the best, you are healthier, your idea passes, you can control your technology, and you move on.

Don't think there's a difference between defence and commercial. When Airbus or Boeing today are selling aircraft in a country somewhere, you have to be the best. Whether it is in Asia or in the United States or in Canada, you have to be the best. I want to make sure the committee understands that.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Thank you very much.

I want to thank you, Mr. Chairman, for your latitude on this.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Thank you, Mr. Guitton.

I will now give the floor to Mr. Bachand.

[Claude Bachand, Bloc, Saint-Jean, QC]

Thank you, Mr. Chair.

I would like to welcome the representatives of these very dynamic companies. I have visited Composites Atlantic Ltd. The president, who is with us today, told me that some succulent lobsters awaited me.

[Maurice Guitton]

The invitation is open to everyone.

We will make sure you have a nice meal when you visit us.