IRBs, global market access and R&B innovation

Developments in the global aerospace sector have compelled the federal government to conduct an in-depth analysis of Canada’s aerospace industry. Yesterday’s release of a two-volume report led by former Cabinet minister, the Honourable David Emerson, provides strategic recommendations that, if accepted, should position Canada’s aerospace industry and space program for long-term success.

The first volume of this report, Beyond the Horizon: Canada’s Interests and Future in Aerospace, calls for the federal government to take a forceful leadership role to further promote Canadian industry. In this context, many of the 17 recommendations made by the Emerson panel will directly impact Canadian aerospace companies.

Broadly, the recommendations call for Canada to encourage industrial growth by articulating priority technologies, loosening export restrictions, fostering industry and academic cooperation, financing long-term research and development (R&D); and, most significantly, requiring weighted industrial regional benefit (IRB) commitments in proposals by prime contractors.

What the proposed recommendations mean for your business

Procurement: industrial regional benefits and Canadian partnerships

Canada typically purchases military aircraft from foreign partners and the success of Canada’s aerospace sector is dependent on its ability to integrate into the global supply chain. Despite a legacy as a leader in offset policy, Canada’s efforts to strengthen its industrial and technological base have fallen short. The purpose of the Emerson report is to establish stronger rules to enable the Canadian aerospace sector to thrive and innovate within a highly competitive global supply chain.

If the recommendations in the report are implemented, the following changes can be expected:
– Detailed IRB requirements for aircraft and aerospace-related procurement proposals will be weighted at 10 per cent in the ranking of bids;
– Preference will be given to bids with strategies that go beyond time of purchase offsets and provide investment obligations in Canada over the life-cycle of the program; and,
– International original equipment manufacturers (OEM) prime contractors will be required to partner with Canadian firms for in-service support (ISS).

Industry Canada will assess proposals and may give preference to IRB and offset plans that identify post-sale activities in Canada. For your business, this change in IRB weighting—if accepted—means that Canadian industry partnerships will be increasingly relevant, and that long-term funding for the aerospace industry will be better sustained.

Indeed, the report highlights that IRB investments should go towards strengthening the Canadian aerospace sector and innovation by incentivizing bidders who invest in R&D via industry or academic institutions.

Regarding Canadian procurement partnerships, the report’s recommendation for a full cost-recovery model for aircraft safety certification may provide prime contractors with more opportunities to invest in Canada and fulfill offset requirements. Such a policy approach will enable small and medium enterprise tier 2 and tier 3 firms to prosper in Canadian industry, while providing OEM and tier 1 firms with increased options for partnerships in Canada.

Global market access

On the international front, the report notes that the new players within the aerospace sector have forced Canadian industry to double its efforts to maintain its place in the global supply chain. The Emerson report proposes a number of policy changes that will enable Canadian industry to adapt to current international trends.

The report’s recommendations call upon the federal Government to sign more inclusive multilateral agreements, while pursuing more bilateral agreements and balanced export and domestic controls.

Signing additional multilateral agreements that are more inclusive and clear, such as those led by the World Trade Organization and the Organization for Economic Co-operation and Development, will clarify rules, promoting cooperation and preventing defection among international aerospace players. Such agreements will reward Canadian firms that continue to follow international rules and regulations.

Noting that export and domestic control measures enable Canada to meet international security obligations and protect national security, the report’s recommendations help ensure that these control measures do not inhibit the innovation and technological development of Canadian firms. If implemented, these will help in terms of expanding overall access to new markets and new partners. We will see increased integration between Canada-US aerospace industries, resulting in better access for prime contractors to firms with innovative solutions and offset opportunities.

Canadian aerospace innovation

The report emphasizes the significance of innovation in maintaining Canadian competitive advantage in the international aerospace sector. To achieve increased success within the global supply chain, Canadian firms must be supported to sustain long-term momentum in technological innovation. The report’s recommendations could lead to the following changes:
– OEM and tier 1 firms seeking to offset R&D costs and sustain innovation at the technology demonstration phase may be eligible for additional funding from a renewed and refunded Strategic Aerospace and Defence Initiative (SADI);
– Firms at all levels may have increased financial incentives to collaborate on priority technologies. These priorities may emphasize R&D focused on increasing aircraft efficiency and reducing fuel use;
– R&D collaboration between firms may be increasingly advantageous through the recommended risk-sharing strategies that would link incentives to revenue generated from innovation rather than a firm’s overall market performance; and,
– Firms generating intellectual property (IP) in Canada could transfer their IP for use in other global markets.

Conclusion

The Emerson report’s call for the government to take an active leadership role in encouraging Canadian R&D may result in increased financial incentive for your firm to engage in offset investment or collaboration with other industry partners and academic institutions.

However, Emerson’s proposed enhancements to procurement, IRB and other policies should be considered within the context of additional new policy initiatives, such as the effort led by Tom Jenkins on leveraging military procurement. The Jenkins report is expected in the first quarter of 2013.

Overall, the government appears to be considering a number of policy developments aimed at improving Canada’s place in the global aerospace sector. Although implementing the Emerson report’s recommendations may pose some challenges, it is anticipated that this will be phased to accommodate industry adaptation.