Aerospace sector flies high, but SMEs need lift

While Canadian aerospace business has declined during the pandemic, a new survey shows research and development remains strong for the export-driven industry. But small manufacturers especially would benefit from more government direction to stabilize the turbulence, an industry association says.

These findings come from the annual State of Canada's Aerospace Industry Report, which was produced by the industry group Aerospace Industries Association of Canada (AIAC) and Innovation, Science and Economic Development Canada (ISED).

The report covers the calendar year of 2021 and includes numerous sources for its data, such as ISED economic models based on Statistics Canada data, forecasts from market analysis firm Teal Group, aggregated industry information from Canada Revenue Agency filings, and administrative data from AIAC members, which includes many prominent aerospace companies.

For the aerospace industry, this report provides a valuable snapshot of how the business is doing and what areas may need more attention. Given that aerospace requires highly educated workers, innovative technology, and a lot of sales to foreign entities, AIAC says this information is especially valuable for those smaller companies seeking to make the next right bet for spending and manufacturing decisions.

In e-mailed responses to Research Money questions, AIAC urged even smaller companies to continue spending the money required in research and development to stay competitive. They acknowledged supply chain issues are hurting the industry, but said as long as efforts continue to secure it on the national level, spending should continue on R&D.

"Not properly funding new ideas means divesting in our future and the position of Canada as a leader," AIAC officials said.

At first glance, the sector appears to be heeding this advice, as  R&D intensity — the ratio of R&D expenditure to GDP — remained strong in 2021. Aerospace manufacturing stood at eight percent, compared with a manufacturing average around three percent.

Upon closer examination, however, the report's numbers show that R&D real-dollar spending has been declining precipitously — a 27 percent drop last year to $710 million. Look across five years, and the picture gets worse: R&D spending is down more than 63 percent from 2017, falling in each of those years.

Help is on the way

AIAC pointed to government as the driver of spending decisions. While saying the Strategic Innovation Fund and the Aerospace Regional Recovery Initiative are helpful new tools from government, the group told Research Money that "we need to make sure the criteria to access them are flexible enough to our industry."

More help may be forthcoming, as the government reviews Scientific Research and Experimental Development (SR&ED) criteria for tax incentives. Budget 2022 also pledged a "new innovation and investment agency" that would see the private sector make R&D spending recommendations with the Canadian government, similar to successes drawn from the Israel Innovation Authority and the Finnish Funding Agency for Technology and Innovation.

Read more: “What Canada’s new innovation agency can learn from the rest of the world”

An aerospace analyst pointed out that Canada has been facing numerous funding challenges in recent years, leading to the popular Canada regional jet program being bought out, and even larger aircraft manufacturers like De Havilland being "not as strong as it used to be."

"We have that ability to design an airplane, and then feed it through down into a supply chain that can make all the bits and pieces that are assembled back into the airplane. We have companies across the country that feed off that, both on the civilian side and the defense side," said Anoush Poursartip, a professor in the University of British Columbia's Department of Materials Engineering who focuses on materials research.

Aerospace, he said, requires a mix of "understanding what you're doing, and understanding the rules — because it's all about safety." As such, Poursartip said the industry is facing a pivot point during which boomers are retiring, and Gen Z is coming into an industry and learning on the spot — all during a global pandemic that is accelerating early retirements.

"The culture of the next generation is not to be in the same job for 40 years," he said. "They want to move on and also, the competition from Amazon, or Google, or Microsoft for the same skill set is actually pretty fierce. So one of the biggest things that the aerospace industry is facing is really recruiting talent."

Canada, he added, needs to look at more innovative ways of manufacturing to stay competitive and to keep younger folks' interest. This approach would incorporate techniques such as digital twinning and advanced modelling to test the performance of aircraft and their components.

"AIAC has been pushing for a bit of a strategy," he said. "I think that strategy for aerospace should be aligned with the strategy for automotive, and align with other industries, because really the threat that goes through all these industries in the future is the impact of digitalization in all its meanings and in all its forms."

Confronting challenges in space

Strategy will be especially crucial for the research-intensive space industry. Space is a subset of aerospace and in Canada, industry groups have traditionally banded together under other advocacy groups to the government such as the Space Advisory Board, which used to provide advice to the federal government.

The board, however, now appears to be in permanent dormancy and the space industry is now asking for a U.K. or U.S.-style National Space Council, a government-only body that would be more closely integrated into the government at a Cabinet level. Space has also been lacking full action on a 2019 strategic plan by the Canadian government, which executed on items like moon exploration but has not yet gone through other ideas put forward by industry.

Canadian space companies, much like their aerospace counterparts, largely include manufacturers focusing on small components like switches and sensors — which AIAC says is vital to keeping the industry going.

"They play an essential and critical role," AIAC said of small manufacturers, noting that satellite integration for Earth observation and other applications really depends on innovative work by Canadian companies. Satellites must be optimized for mass, weight and power and work in very harsh conditions during spaceflight — including long-term radiation exposure and short-term stresses during the launch phase.

Poursartip noted that despite the R&D funding challenges of today, components in aerospace remain remarkably strong. "Planes are lighter, they're stronger, they use less fuel," he said, pointing to innovations in composite materials and electronics as generating these benefits.

But Canada, he said, should be doing an assessment of its strengths and weaknesses and figuring out where best to be pushing for industry focus. "My feeling is very much that we have great strengths. We have some very good programs. But then you have gaps," he added.

During Poursartip's travels, he said his counterparts in the United Kingdom and the United States are often surprised at the patchwork of funding available in Canada compared with the often more top-down approaches in those countries.

"They'll often go wow, that's complicated, and I find it difficult to explain it," he said, suggesting that it is worth the effort to establish “a stable ecosystem in which to invest, in which to take risk in, in which to grow."

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