Text Version (IBM-PLI Quality Score Ranking): IBM-PLI Quality Score Ranking
Text Version (IBM-PLI Profitability Index Ranking): IBM-PLI Profitability Index Ranking
Western Canadian Capabilities in Aerospace: Strong Tier 2 Capabilities
Western Canada’s aerospace industry employs approximately 17,000 people in Alberta, British Columbia, Manitoba and Saskatchewan. With $3 billion9 in annual revenues, companies located in Western Canada are involved in a wide range of value-added activities in this sector. These include:
In terms of job count and number of companies, Winnipeg is the largest aerospace cluster in Western Canada, employing about 5,300 people10. Winnipeg is a major centre in North America for the manufacture of composite aircraft components and aircraft maintenance, repair and overhaul (MRO) services. Vancouver is the next-largest aerospace cluster in Western Canada, with strengths in composite aerostructures, MRO, design and manufacture of small satellites, and information support systems. Saskatoon and Calgary also have small aerospace clusters, with Calgary firms focused in areas such as unmanned vehicle systems and defence electronics, while Saskatoon firms are engaged in satellite-based communications systems, products and services.
Western Canada also has some important national aerospace research and training institutions that anchor the long-term competitiveness of this sector. These include the University of Manitoba’s Faculty of Engineering (home to a Tier I Canadian Research Chair [CRC] in Aerospace Materials), which offers degree programs with specializations in aerospace engineering; the Composites Innovation Centre (CIC) in Winnipeg; the British Columbia Institute of Technology (BCIT); and the Stevenson Aviation and Aerospace Training Centre at Red River College (which offers a wide range of technical certificate and degree programs in Aircraft Maintenance Engineering, Aircraft Gas Turbine and Airport Operations).
Business Case Analysis: Western Canada’s Aerospace Sector Ranks below Other North American Destinations
Our analysis of the IBM-PLI data gives an interesting snapshot of the global competitiveness of this sector in Western Canada. On IBM-PLI’s Quality Score, western Canadian centres are ranked as follows out of 32 global centres: Vancouver – 13th, Winnipeg – 17th, Calgary – 17th and Saskatoon – 21st. On their Profitability Index, western Canadian centres are ranked as follows: Winnipeg – 6th, Calgary – 6th, Vancouver – 7th and Saskatoon – 7th, bearing in mind that profitability metrics were similar across many jurisdictions, according to IBM-PLI data.
In terms of the different qualitative factors influencing this ranking, western Canadian centres rank competitively in areas such as their general business environment, infrastructure and living environments. However, they ranked relatively poorly in areas such as flexibility of labour and regulations, the presence of an industry cluster, and local potential to recruit skilled staff.
Taking a step back from the actual scores, three points are important to observe from the benchmarking data. First, what is significant about this ranking is that western Canadian centres rank significantly below other Canadian centres, particularly Montreal (ranked 3rd) and Toronto (ranked 4th). Second, western Canadian centres rank just as highly (from a quality perspective) as do other Tier 2 U.S. aerospace clusters like Albuquerque, Wichita, Austin, Tulsa, Denver and Huntsville. These U.S. clusters have been receiving major investments from U.S.-based aerospace companies in the past decade, particularly post-9/11. Third, IBM-PLI’s Profitability Index shows that western Canadian centres do not have a major profitability advantage over other Canadian Tier 1 or even Tier 1 U.S. centres (such as Belleville/Seattle). All three points on quality and profitability are important when thinking about the types of policies and programs that need to be put in place to encourage further aerospace investments in Western Canada.
Industry Structure and Competitive Dynamics: Domestic Rather than Foreign Backbone
While we think that the plant operations of foreign investors (such as Boeing) provide important anchors for the development of this sector in Western Canada, other factors related to the global aviation and aerospace industry have also been important elements that have led to the type of growth and structure of the aerospace industry in this region. These factors include: investments by Canadian firms and the growth of home-grown western Canadian firms, Canadian and foreign government aerospace contracts, the historical interaction between Canadian firms and their foreign customers, and the strong presence of the aerospace industry in Quebec and Ontario. It is important to keep these points in mind when thinking about the types of policies and programs that need to be put in place to encourage further aerospace growth in Western Canada.
In our view, the most important foreign investor in Western Canada’s aerospace industry is Boeing Canada Operations Ltd. Established in 1971 with 50 employees, Boeing’s Winnipeg facility employs 87% of its Canadian workforce (Boeing employs 1,300 people in Winnipeg) and accounts for 7.6% of employees in Western Canada’s aerospace industry11. Winnipeg is home to one of Boeing’s ten major global sites for commercial aircraft – only one of three such sites outside the United States – and the Winnipeg facility is the largest composite manufacturing facility in North America. Supplying its worldwide commercial airplane production, Boeing Canada Technology's Winnipeg division manufactures more than 1,000 parts and assemblies in Winnipeg for the company’s 737, 747, 757, 767, 777 and 787 aircraft.
Aside from Boeing, however, it is interesting to note that most major aerospace manufacturing employers in Western Canada have historically been homegrown western Canadian firms or divisions of Tiers 1 and 2 Canadian aerospace and aviation companies.
To illustrate this point, take Aveos (700 employees in Winnipeg12), Magellan Aerospace (650 Winnipeg employees12), StandardAero (1,200 Winnipeg employees12), Cascades Aerospace (600 employees in Abbotsford13) and Avcorp (480 employees in Delta14). Together with Boeing’s 1,300 employees in Winnipeg, these six firms form the backbone of Western Canada’s aerospace industry, employing about 73% and 29% of Manitoba’s and Western Canada’s aerospace workforce, respectively.Aveos was formerly Air Canada Technical Services, which changed its name to Aveos Fleet Performance Inc. to reflect Air Canada’s new ownership structure back in September 200815. Its largest customer is still Air Canada. Mississauga-based Magellan Aerospace Corporation acquired Winnipeg-based Bristol Aerospace Ltd. in 1997. What is interesting is that Bristol Aerospace was established by Jim and Grant MacDonald in Winnipeg, as the MacDonald Brothers Aircraft Company, in 1930. StandardAero (acquired from The Carlyle Group by Dubai Aerospace Enterprises in 2007) is one of the world's largest independent gas turbine engine and accessory repair and overhaul companies. StandardAero was founded in Winnipeg in 1911.
Avcorp, a world leader in the design and manufacture of airframe structures, is headquartered in Delta, B.C. Cascades Aerospace, one of North America’s Top 10 MRO companies, is based in Abbotsford, B.C.
Put together, it is fair to say that the western Canadian aerospace industry is home to a strategic mix of Tier 1, 2, 3 and 4 aerospace manufacturers and service companies that form an important part of the North American aerospace value chain.
However, in putting the sector’s overall size in perspective, it is interesting to note the relative size of aerospace clusters in competitor Tier 2 global and North American locations. Scotland (population: 5.1 million) had 16,000 employees in its aerospace industry in 200816. New Mexico (population: 1.9 million) had 8,000 employees in its aerospace industry in the same year17. Colorado (population: 5.0 million) had 24,700 employees in its aerospace industry that year18.
What is significant is that these new Tier 2 centres, such as Albuquerque, Belfast, Glasgow and Queretaro have Tier 1 aerospace companies with plants operating there. Bombardier’s Learjet wings have been made in Belfast since 1990; the Glasgow-Prestwick corridor has MRO and manufacturing facilities for British Airways, Rolls-Royce, General Electric and Goodrich Corporation; and Queretaro has wiring harness manufacturing facilities for Raytheon, Bombardier and Cessna.
Put in this global context, it is clear that the competitive advantages that have resulted in the growth of the aerospace sector in Western Canada are changing rapidly. Some of the trends will continue to be net-positive for Western Canada. While commercial air travel continues to grow worldwide, there are now only four manufacturers of commercial airliners: Boeing, Airbus, Bombardier and Embraer. Long-range forecasts predict continued growth in worldwide passenger airline travel of about 5% on average over the next 20 years, with comparable growth in demand for their aircraft. This growth in demand for commercial aircraft should translate to steady growth in Western Canada’s aerospace industry (MRO, parts, composites, etc.).
However, the aerospace industry’s business models have changed. The era of huge aircraft factories is gone. Boeing, Airbus, Bombardier, Embraer, Raytheon and many Tier 1 aircraft manufacturers have already taken steps to ensure that they are no longer directly involved in parts manufacturing. Separating parts manufacturing from final assembly and certification allows these Tier 1 players to focus on the highest level of value-added work, and also allows them to purchase parts and sub-assemblies from Tier 2, 3 and 4 vendors throughout the world, usually at far lower costs.
While this change in business models can be positive for Western Canada’s aerospace industry, it also means greater competition with other Tier 2 locations. One of Winnipeg’s and Vancouver’s main competitive advantages, which is highlighted to foreign investors, is the overall lower cost of operations compared to other Tier 2 locations. However, as we see from the IBM-PLI data, both from a quality and cost perspective, western Canadian centres may no longer show any such advantages over other Tier 2 U.S. or global centres. Furthermore, as quality improvements materialize in developing Tier 2 locations (such as Shanghai, Queretaro and Rzeszow), we think that existing Tier 2, 3 and 4 vendors will be moving some production out to these developing-country locations.
Foreign Direct Investment Implications: Targeting Tier 0 Investments
Our analysis, above, of the western Canadian aerospace industry shows that the number of foreign investors locating in western Canadian centres is relatively limited. The largest cluster, Winnipeg, has one major foreign investor: Boeing. The other anchor companies in Winnipeg (and Vancouver) are all home-grown western Canadian outfits.
From a growth perspective, it will be crucial for policymakers to attract major operations of Tier 0 U.S. and Canadian aerospace companies to Western Canada. The presence of a wider industry cluster is absolutely crucial to the growth of this industry.
In the policy section below, we provide, as a case study, New Mexico, which has the fastest-growing aerospace cluster in North America. New Mexico took a “blue skies” approach to the development of its aerospace cluster four years ago and introduced a combination of tax and facilities development incentives. Tax incentives ranged from a job training incentive program, a high-wage job tax credit, an aircraft maintenance or remodeling tax deduction, an aerospace R&D tax deduction, an aircraft manufacturing tax deduction and four tax deductions related to the establishment of operations in its new Spaceport America facility. The state also funded the development of its Spaceport America facility, to the tune of $200 million. New Mexico was also aggressive and targeted in its marketing efforts to ensure that the benefits of establishing plants and operations within its boundaries were clearly understood by Tier 0 companies.
The result of these policies is clear. For a sector that had only 1,100 employees in 2005, New Mexico now has over 8,000 employees and companies such as Boeing SVS, Northrop Grumman, Lockheed Martin, Honeywell Defense Avionics, Raytheon, Goodrich and Virgin Galactic are establishing operations in New Mexico.