Mr. Speaker, it is my pleasure to join in the debate on the Department of National Defence and the Canadian industrial base as proposed by the official opposition.
This is the age of information, the age of rapid change. We are not just talking about technological change, which most of us have managed to keep up with over the course of the past ten years, but about change in the very nature of the way people relate to each other and the way things are done. With the fall of the Berlin wall, we began a period of change more radical and intense than anything we have known since the invention of the cold war.
I am here today to speak about those changes which affect the relationship between DND and the defence industry and suggest a view of what that new relationship may look like.
Actions in the world have caused a reaction in DND. Let me trace the main actions and then the DND reaction. The first action was the fall of the Berlin wall, which led to a reassessment of Canadian defence concerns.
The second action is the fiscal situation in the country. We have a deficit and a significant debt. The negative effects of the situation have been made clear to all of us over the past year. There is now widespread agreement that this situation must be revised through budget cuts.
The third action results from the need to reduce the number of employees in the federal public service, including DND. This results in a significant reduction in the workforce. All of these actions affect DND, resulting in changed roles, reduced budgets and reduced personnel.
Now let us have a look at the industry side. We can see that these same events-the fall of the Berlin Wall, the reduction in military personnel and budget cuts-have put considerable pressure on Canadian industry and their export markets. This is the case, specifically, for many of the companies involved in Canada's defence industrial base, which we want to be able to count on in the event of an emergency.
As for DND's reaction, it does not require a whole lot of intelligence to realize that the department is no longer merely a spectator in this age of change. It is a participant and must make its own changes. DND must look after its affairs differently and change its structure if it is to succeed in this new context.
This need for change led to the defence white paper of December 1994. In general this document reconfirmed the need for multi-purpose, combat capable sea, air and land forces to perform a wide variety of tasks at home and abroad: the protection of sovereignty and security; co-operation with the United States in the defence of North America and contributions to peace and security abroad.
In addition, the white paper indicated that to accomplish these ends, DND would have to operate more efficiently and make optimum use of equipment, infrastructure and human resources specifically to focus on maintaining core capabilities, reduce and refocus regular and reserve forces and the civilian workforce, to reorganize the command and control systems and to purchase affordable equipment.
The white paper also recognized the need for the department to exchange or enhance its partnership with the private sector, work toward harmonizing industrial and defence policies to maintain essential industrial capabilities, transfer activities currently conducted in-house to Canadian industry or to share them with industry under various partnerships arrangements when a business case of the same could be made, modernize and streamline procurement process and in general to seek innovative ways to support operational forces.
It must not only be said of the Canadian defence industrial base that DND must adapt to the new circumstances but that our industries must also do things in a different way with a different structure if they hope to fulfil their corporate visions in the new age.
It would be worthwhile to provide an overall context for the Canadian defence industry through some relevant defence statistics. Canadian defence spending is quite small compared with that of other western nations. It is about 1.5 per cent of GDP. Canadian defence and defence related industry accounts for little more than 1 per cent of the gross domestic product and somewhat less than 1 per cent of the Canadian labour force which equates to between approximately 60,000 and 80,000 direct and indirect jobs.
With few exceptions like Bell Helicopter, CAE, the diesel division of General Motors, Diemaco and Saint John Shipyard Ltd., our industry produces subsystems, components for niche markets rather than complete systems. A Canadian defence industry is highly specialized with particular strength in the areas of aerospace, electronics and communications. This enables our industries to be well positioned in the competitive process.
Canada's defence industry has the ability to diversify its activities and to come to terms with niche markets, which augers well for its future. As you can readily understand, Canada's defence expenditures alone will not support Canada's current defence industrial base. Our defence industry's survival and prosperity depends on its selling or exporting dual purpose commercial products.
I would now like to talk about the factors and new realities governing relations between DND and the defence industry in Canada. It is clear, on the one hand, that our present budget precludes our supporting an industry base of the size we might have had a few years ago. Funding additional resources is totally beyond our present means.
Our desire today is for a sound Canadian defence industrial base which optimizes the number of national sources of goods and services available to support the Canadian forces during operations.
In addition, the scenario for operations today for us and our major allies is pretty much accepted to be "come as you are". Under these conditions, our interests are best served by supporting the overall health of a Canadian industrial base which includes a broad range of technologies and support capabilities that we need.
From another aspect, DND has the responsibility to recognize the considerable impact which expenditures from the defence budget have on the Canadian economy and the Canadian industrial base.
DND must smoothly integrate other factors and government program initiatives such as the development of dual use technologies, demonstration of a peace dividend, defence industry conversion, development of export markets and the like into its procurement process.
Let me give some specific examples of our changing relations with industry. Although DND's budget has been reduced, the department remains committed to the goal of devoting a greater share of defence expenditures to capital acquisition.
To maximize the return from these expenditures, the department will be approaching its future capital procurement based on principles such as the following. First, it will accelerate the shift to off the shelf technology and commercial specs and standards. Second, it will augment our reliance on the private sector in the day to day support of commercial items. Third, it will seek to avoid unique Canadian solutions that require expensive and risky research development or modifications. Fourth, whenever possible it will purchase equipment with performance which has been demonstrated in the field.
As a result of the budget cuts and changes in thinking mentioned earlier, it is only logical that the department will have to rely to a much greater extent on the private sector to meet equipment support needs of the Canadian forces in the future.
The trend will be government partnering with industry, that is government seeking solutions from industry rather than dictating solutions to industry. In addition, in order to allow Canadian firms to increase their productivity and competitiveness, DND is looking at how it can make doing business with government easier.
While both DND and the industry try to maintain a sufficient industrial base, they are under considerable pressure and must adapt to a completely different defence framework in industrial terms. Exporting, which in the past was a way to compensate for a low demand from Canadian forces, has become a double-edged sword.
World over-supply and competition from the former eastern block and Asian countries will create an increasingly competitive market.
As defence budgets around the world began to shrink significantly, there was much talk about the need to convert military production to civilian or commercial production. However, defence firms used to selling to one customer, the government, find themselves ill-equipped for the commercial market where tastes change rapidly.
The same problem of the conversion to the private sector market was faced in the United States. The problem in defence downsizing and conversion for the Canadian industry is much less significant than that in other western industrialized nations.
As I stated previously, the Canadian defence industrial base is a highly diversified one. In fact, only a handful of companies make complete defence systems such as Oerlikon Aerospace and Diemaco.
Also included in Canada's defence industry are several companies that make complete dual use or commercial systems for the global market, such as Canadair, CAE Electronics, and Bell Helicopter; manufacturers that are primarily oriented toward niche marketing and the exports of parts components and sub-components, such as Pratt & Whitney Canada, Canadian Marconi, and Allied Signal; and several repair and overhaul contractors, such as IMP and CAE Aviation. As such, the Canadian industry is well placed to respond to and weather the challenges posed by defence downsizing.
Spar Aerospace, for example, has reduced its defence operation and has increased its market diversity. At the same time, it has vertically and horizontally integrated its operations by acquiring an interest in Telesat Canada. Furthermore, it has acquired Comstream and prior data giving an additional technology in the area of satellite broadcasting and data compression as well as access to additional markets.
Other companies, such as Computing Devices of Canada, have chosen to remain in the defence market, realizing that there are still many opportunities in the global defence market for competitive high tech companies.
At this juncture I think it would be valuable to give an insight into our assessment of what the major features of the defence environment are likely to be. Broadly speaking, the following characteristics will likely dominate. First, domestic procurement expenditure by the Department of National Defence will not see any appreciable increase and will decline across the board. Second, the nature of what is bought and the size of the buys may change. This could mean a move toward non-leading edge technology in weapon systems and an increase in demand for repair and overhaul items, thereby placing greater emphasis on services. Third, there will be an excess capacity in the worldwide defence sector. Finally, competition will grow, and worldwide protectionist tendencies will be more difficult to maintain under the world trade agreement.
The preceding features will affect government and industry equally. However, the appropriate response to the new defence environment will need to take into account the complementary but unique role each plays.
Let me deal with industry first. The rationalization of a North American defence industrial base will likely conform to the following scenario.
First, there will be a gradual movement out of the defence sector, particularly on part of those marginal firms that only entered the defence business to take advantage of the increased DND procurement activity and for which defence sales have always been a marginal aspect of their sales. The pressure to exit may be offset to some extent by the growth in the use of dual-use technologies, giving rise to new marketing opportunities for the businesses.
Second, while still searching out export markets firms that remain in defence sales will probably reduce still further the portion of their business activity devoted to defence.
Third, there will be an increase in strategic downsizing, merger, and joint venture activities. We must try to reduce risks and offset unit cost increases. We have seen a great deal of evidence of this with major U.S. contractors already. Firms are selling off unprofitable divisions to concentrate on core expertise in particular systems or acquiring competitors' divisions to remove former competitors and emerge as centres of expertise.
Fourth, product lines will be re-evaluated in terms of the civilian and military mix. Extra efforts will be made to respond where possible to the new demands for innovative products.
Finally, there will be a renewed emphasis on technology based R and D.
In spite of the difficult international environment that lies in wait, the bottom line is that the Canadian defence industry has been successful to a significant degree because of its outward business approach.
On the government reactions, the Canadian defence industrial base plays an important role in meeting the peacetime and wartime requirements of the Canadian forces. As such, we ignore the health of Canadian industry at our peril. The role of the government in management of change in the industrial base falls into three categories. First is the maintenance of a suitable trade environment for Canadian industry. Second is to select support through established programs or specialized assistance where warranted for critical operational requirements. Third is enhancing the Canada-U.S. material co-operation.
In giving the House a brief overview of how the department is responding to current challenges, I need to stress two factors. First, DND's resources are finite. It cannot simply throw money at the problems faced by industry, as the essence of its corporate problem is a significantly reduced fiscal framework in which to operate. Second, the fact that much of Canadian industry is focused on sales abroad, to the U.S. in particular, presents DND and the government with a unique policy challenge. A substantial degree of vitality of Canadian industry and its ability to support our operational needs is strongly influenced by developments in the U.S. Our industrial base planning must take this unusual situation into account.
DND must smoothly integrate factors and government program initiatives such as development of dual-use technologies and demonstration of a peace dividend, defence industry conversion, and development of export markets and the like into its procurement processes.
