Volume 1: Beyond the Horizon: Canada's Interests and Future in Aerospace – November 2012
Analysis and recommendations
While this volume focuses on the aerospace sector and the companion volume, Reaching Higher: Canada's Interests and Future in Space, focuses on the space sector, many of the recommendations in this volume will be helpful to companies that design and produce space products and services, as well as academics and researchers who study and teach on space.
The companion volume lists the recommendations from this volume that have at least some relevance for the space sector. Where that relevance is particularly great, space is specifically mentioned alongside aerospace in the following chapters.
Developing the technologies of the future
The core truth of the aerospace industry is this: it turns on innovation at all levels. Technological superiority, from product design to manufacturing processes, is essential to the fortunes of individual firms and the sector as a whole.
To secure and enhance its competitive standing in the years to come, the Canadian aerospace industry must be a leader in inventing, developing, manufacturing, and marketing the technologies of the future. This, in turn, means it must cultivate the robust, original research on which innovation is based.
Creating conditions in which innovation is encouraged and accelerated requires coordinated efforts on the part of industry, research institutions, and governments. Each holds a piece of the puzzle. If companies and researchers do not do their part, policy and program support will be for naught.
The research intensity of the Canadian aerospace manufacturing industry currently lies in the middle of the pack among major aerospace powers. The Technology Development, Demonstration and Commercialization Working Group underscored the urgency of not only doing more, but also ensuring that research is focused in areas where the benefits to the industry and the country are likely to be greatest.
Description of Figure
This horizontal bar chart shows that France has the highest research and development intensity among the major aerospace nations at 32%, followed by the United States (30%), Canada (21%), Germany (17%), the United Kingdom (13%), and Japan (11%).
The largest aerospace-specific program to support innovation in the sector is the Strategic Aerospace and Defence Initiative (SADI), which provides repayable contributions to aerospace, space, defence, and security companies. Since its creation in 2007, SADI has authorized $825 million in assistance to 25 projects and disbursed $405 million.Footnote 4 SADI applications must describe the objectives of the proposed research project and provide a detailed plan of how the project will be implemented. Applications are assessed against criteria such as the technological feasibility of the project, the applicant's managerial capabilities and financial capacity, and broader benefits to the Canadian economy. SADI contributions typically amount to 30 per cent of a project's total eligible costs and repayment is generally over a 15-year period. Standard repayment provisions can be conditional on the applicant's gross business revenues or unconditional.
In addition to SADI, a number of smaller programs and initiatives help aerospace companies undertake pre-competitive R&D activities:
- National Research Council (NRC) Aerospace has five laboratories through which it works with industry and universities to develop products and services. It has an annual budget of $58 million, with $34 million coming from the federal government and $24 million from industry partners. In addition, the NRC-Industrial Research Assistance Program (NRC-IRAP) helps SMEs build innovation capacity and develop technologies that can be commercialized in Canada and abroad. IRAP offers technical and managerial advice, funding, and networking opportunities, and provides about $24 million each year to support aerospace-related projects.
- The Green Aviation Research and Development Network (GARDN) funds collaborative research projects aimed at reducing aviation's environmental footprint. The program was established in the context of support for business-led Networks of Centres of Excellence and was given annual funding of about $3.25 million from 2009 to 2013 from the federal government and a similar amount from industry partners.
- The Industrial Research Chairs initiative and Collaborative Research and Development grants of the Natural Sciences and Engineering Research Council (NSERC) are widely used by aerospace companies as they undertake research projects in cooperation with universities. These projects help ensure that students are trained as potential future employees and that companies have access to the expertise and equipment available in academic institutions. In 2011-12, NSERC provided about $20 million in support of aerospace research and the amount continues to rise each year with increased demand from industry.
Figure 15: Top 10 research-intensive industries in Canada – 2011
Description of Figure
This horizontal bar chart shows that the aerospace manufacturing industry has the second highest research and development intensity among Canadian industries, with an intensity of about 22%. The industry with the highest intensity is computer and electronic product manufacturing, with an intensity of 31%. Pharmaceutical and medicine manufacturing ranks third with an intensity of 14%, while the other industries have intensities ranging between 3% and 8%.Source: Based on data from Statistics Canada.Note: R&D intensity is calculated as R&D performed by each industry in Canada divided by each industry's gross domestic product.R&D = research and development
- Sustainable Development Technology Canada (SDTC) supports the development of clean technologies. The program, which is primarily targeted to SMEs, provides about $9.5 million in annual support to the aerospace sector.
- The Canadian Innovation Commercialization Program (CICP) helps Canadian businesses move new products and services from the lab to the marketplace by awarding government contracts to firms with pre-commercial innovations, testing those innovations within federal operations, and providing feedback that companies can use for the purposes of commercialization. CICP, which is managed by Public Works and Government Services Canada, was launched in 2010 as a pilot project with funding of $40 million over two years. Budget 2012 announced that the program would be made permanent, with funding of $95 million over three years, starting in 2013-14, and $40 million per year thereafter.
Finally, aerospace firms, like all companies in Canada, can offset R&D costs through the Scientific Research and Experimental Development (SR&ED) tax incentive program. Based on recommendations from the Review of Federal Support to Research and Development,Footnote 5 the rules governing SR&ED were tightened in Budget 2012 to free up funds for more direct forms of R&D support, including a doubling of IRAP's budget and an investment of $100 million to support the Business Development Bank of Canada's venture capital activities. While none of these programs are sector-specific, aerospace companies can and do take advantage of them.
Federal efforts to promote research, development, and innovation in the aerospace sector are not large by international standards, but they have made important contributions to the sector's competitiveness. Examples of technological and commercial successes that were facilitated by such programs—sometimes in combination with investments by provincial governments—include:
- the development of technologies that have been incorporated into Pratt & Whitney Canada's advanced engines, used in applications spanning a variety of aircraft, including Virgin Galactic's White Knight Two, a craft designed to carry a commercial space vessel to high altitude before being launched into space;
- Héroux-Devtek's development of the landing gear for the Bombardier Learjet 85 business jets and Embraer Legacy 450/500 business jets, which target the medium-sized segment of the business jet market; and
- CAE's Project Phoenix, one of the largest R&D efforts in its history, which paved the way for new lines of cutting-edge flight simulators that cemented the company's status as the dominant global player in the synthetic training market.
Description of Figure
This vertical bar chart shows that 62% of the R&D performed by aerospace manufacturing companies in the United States is funded by government expenditures, by far the highest share among the major aerospace nations. Germany ranks second at 39%, followed by France (27%), the United Kingdom (21%), and Canada (16%).
Data for Germany, France, and the U.K. include funding from the European Commission programs.
Does not include tax credits.
These sorts of achievements would have been much more difficult, and may not have happened in Canada at all, without support and risk-sharing by government. But as conditions evolve, policies and programs must evolve with them.
Recommendation 1: Aerospace and space as a science and technology priority
The Government of Canada's Science and Technology (S&T) Strategy, released in 2007, identified four strategic areas of national interest from a social and economic perspective: environmental science and technologies, natural resources and energy, health and related life sciences and technologies, and information and communications technologies. These areas benefit from additional policy consideration and resources, notably through NSERC's Strategic Project Grants and Strategic Network Grants, which support research and training.
In spite of being among the global leaders in aerospace and despite the central economic, social, and security roles of aircraft in a vast country with a geographically dispersed population, Canada does less than other aerospace powers to recognize the sector as having national strategic importance.
By adding aerospace and space as a fifth strategic sector, the government will send an important signal regarding the sector's importance to Canada and the government's commitment to its long-term competitiveness. This has value both at the symbolic level and as a form of guidance to those who administer funding programs of general application, such as NSERC granting programs and the NRC's IRAP.
Recommendation 2: A list of aerospace technology priorities
Given the increasingly competitive global marketplace and the significant amount of time and money required to develop aerospace innovations, it is important that, in addition to making aerospace an S&T priority, public policies and programs concentrate on the aerospace technologies with the greatest long-term potential.
Aerospace companies and researchers are already developing responses to some of the challenges Canada faces in its pursuit of wealth creation, national security, delivery of critical public services, emissions reductions, and environmental stewardship. A "sweet spot" exists where there is a confluence of the tools vital to Canada's future, rising demand in the global marketplace, and the technologies and products conceived and tested by Canadian researchers and businesses.
Emphasis should be placed on these areas. Otherwise, support will end up being spread too thinly across a wide range of initiatives that, in many cases, have little chance of global success. It makes far more sense to focus on technologies where Canadian industry can build on its comparative advantages and secure a global leadership position.
That said, this focus cannot be absolute. An unduly prescriptive and detailed approach to priority technologies risks starving promising possibilities of support just because they fall into areas that eluded attention at the time priorities were being determined.
The goal should be to find a midpoint between a poorly targeted approach that disperses efforts and dissipates their impacts, and an excessively prescriptive approach that sees governments attempting to pick winners among specific products and firms.
To strike an appropriate balance, the list of priority technologies should be relatively high level and limited in number. If there are more than 10 priorities, it can fairly be said there really are no priorities at all.
The list should be established on the basis of advice from a network of industry, academic, and government experts from across the country. Given its objectives, and the long-term nature of aerospace technology development, the list should be relatively stable over time, but reviewed and adjusted annually for relevance and efficacy.
To ensure that the selected priorities help maximize the competitiveness of the aerospace sector, they should reflect the intersection of areas in which:
- the Canadian aerospace industry and research community have a competitive edge thanks to existing technological strengths or natural advantages afforded by factors such as Canada's geography;
- Canadian governments are expected to have public policy and procurement requirements, thereby creating a natural market; and
- domestic and global demand more generally is likely to remain strong or grow.
In light of current and anticipated demand in the global aerospace market, it can be expected that the list of priority technologies will be influenced in no small part by the need to increase aircraft efficiency and reduce fuel use and environmental impacts.
Once established, the list—along with priorities for the Canadian Space Program established pursuant to the recommendation 1 in the companion volume—should be used to guide decisions around R&D funding and industrial benefit policies. Proposals in areas not covered by the list should not be automatically excluded, but they should have to pass a much more demanding test in terms of their transformational and commercial potential.
Recommendation 3: A technology demonstration program
Technological development requires systemic progress from principles and concepts through testing and refinement to the point where a new technology is ready for commercialization. This process is often described by industry, researchers, and government as comprising nine technology readiness levels (TRLs), which are clustered into three general phases: basic and applied research; technology demonstration, which is used to prove the viability of a technology through trials and adaptation; and the development and commercialization of products. Public policies and programs need to provide reasonable coverage of all these phases if they are to help industry conduct the research necessary to remain at the cutting edge of innovation.
The role of technology demonstrations in aircraft development
In the first phase of technological development, basic concepts and principles are studied, often in collaboration with universities or research institutions. Practical applications of the technology start to be defined and laboratory-based studies are conducted to validate new concepts.
The second phase, called technology demonstration, involves gradually moving the new technology out of the laboratory to test and validate it in increasingly realistic settings, involving temperature extremes, severe vibrations or sudden impact, for example. This process is essential to ensuring that the new technology can fulfil its intended use and not conflict with other components or systems of the aircraft.
Technology demonstrations involve a progression in the test environment, as the new technology is first validated in a simulated setting, such as a hangar or a wind tunnel, before ultimately being assessed during test flights on board an aircraft. Demonstrations also entail increasing system complexity. The technology is initially tested in isolation, which is a small-scale process that can often be managed by the innovating firm. But the technology is eventually tested in an entire system (e.g., an engine, landing gear, or wing)—alongside new technologies produced by other firms that also require testing—before finally being integrated onto the test aircraft. These large-scale demonstrations are complex, time consuming and require specialized equipment, facilities, and researchers. As a result, they are almost always conducted through collaborative efforts involving various firms, universities, and research institutions.
Given the strict regulations surrounding safety of aircraft, the demonstration phase is conducted under close scrutiny, with precise measuring instruments and extensive documentation of results. The entire demonstration phase can last several years.
It is only after the demonstration phase is successfully completed that the technology can be moved to the third phase, which involves certifying the final product for operational use and commercialization.
Three phases of technological development
"valley of death"
products and commercialization
Current federal programming accessed by the aerospace sector provides adequate levels of support at early and later TRLs, and for small-scale technology demonstration through initiatives like SDTC and GARDN, both of which are funded on a temporary basis. For larger projects, however, existing programs fall short with respect to technology demonstration. This gap is problematic, given that technology demonstration is expensive, the technologies are complex, and—because they are as yet unproven—they may entail considerable risk for the companies developing them. Even if a technology is clearly shown to have commercial potential, it may not generate cash revenue for years.Footnote 6 In addition, technology demonstration frequently requires cross-industry collaboration: one cannot fully assess new landing gear, for example, without testing it on an aircraft.
Among the aerospace powers, Canada is notable for its lack of support for this crucial phase in the development of new technologies. Within the industry, technology demonstration is known as the valley of death: the stage at which innovations are often abandoned due to lack of capital to test them. This is a structural deficiency affecting the performance of the Canadian aerospace industry, and an area where government can appropriately play a role in unlocking innovations to the benefit of the sector and the economy as a whole.
The European Union's Clean Sky Joint Technology Initiative
The European Union funds aeronautical technology demonstrations through its Clean Sky Joint Technology Initiative. Clean Sky supports the development of breakthrough technologies to achieve specific targets with respect to reducing aircraft noise and emissions. Clean Sky is organized around six integrated technology demonstrators focusing on different research themes:
- smart fixed-wing aircraft;
- green regional aircraft;
- green rotorcraft;
- systems for green operation;
- sustainable and green engines; and
Clean Sky is one of the largest European research programs ever, with a total budget of €1.6 billion (about $2 billion) over seven years, shared equally between the European Commission and the industry. Public funding therefore covers up to 50 per cent of the costs of technology demonstrations, and is entirely non-repayable.
The focus of this new program should be on large-scale technology demonstration that involves at least one OEM and/or tier 1 integrator, at least one university or research organization, and at least one smaller supplier. Annual funding for the program should be set at $45 million per year, to be paid through reallocation of $20 million from SADI and $25 million of the savings from the tightening of SR&ED eligibility criteria. Support should cover up to half a project's costs, and take the form of non-repayable contributions. The terms and conditions of the program should be carefully reviewed to ensure compliance with international trade rules.
The technology demonstration program will have a number of important benefits. First, it will accelerate technology development and save costs because several participating firms will have the opportunity to prove their technologies simultaneously. Second, it will result in greater knowledge diffusion, since all partners in the collaborative project will share their expertise and gain access to the resulting intellectual property. Third, it will support supplier development because small firms involved in the project are likely to be retained for the production phase. Finally, it may encourage the emergence of tier 1 system integrators—an area of relative weakness for the Canadian aerospace sector—since large-scale demonstrations require the integration of many technologies and the coordination of activities and resources from many participants.
In addition to creating a program for large-scale technology demonstration, consideration should be given to maintaining existing levels of funding for initiatives such as SDTC and GARDN that support smaller-scale technology demonstration.
Recommendation 4: SADI improvements
SADI is a key program with clear and important policy goals. Experience shows, however, that its terms and conditions have a number of design limitations that have reduced its value as a facilitator of the sort of innovation required to position the Canadian aerospace and space industries for long-term competitive success. These limitations should be corrected, given the scale and determination of other countries' investments in aerospace and space R&D.
There are three fundamental shortcomings with SADI's existing terms and conditions:
- They set repayment terms that are based on a company's general financial situation rather than the success of the funded project. As noted in the report of the Technology Development, Demonstration and Commercialization Working Group, there is a perception within the industry that SADI's funding terms essentially track prevailing rates of interest, making SADI similar to a public version of conventional loans. While this characterization can be debated, it raises questions about the financing terms that will be most conducive to supporting higher-risk innovation.
- They do too little to encourage collaboration among different companies and researchers. Consequently, most SADI funding goes to individual firms rather than broader consortia.
- They restrict the use outside Canada of intellectual property generated through SADI-sponsored R&D. These constraints are intended—reasonably enough at first blush—to ensure that the investment of public funds will produce jobs for Canadians. But they have downsides for an industry that is enmeshed in global supply chains and whose member firms prominently include subsidiaries of foreign-headquartered companies. If they are too rigid, these constraints can actually undermine Canadian companies' competitive position and reduce the wealth-generating value of technological advances for the Canadian economy.
First, SADI funding should be provided more on a risk-sharing basis: when a specific innovation is supported, the timing and rate of repayment to the public purse should be linked to the revenue generated by that innovation, not to a firm's overall financial performance. This approach focuses more directly on a specific technology and its development rather than a more broadly secured corporate loan with technology "hooks" to qualify. Corporate debt markets are well-developed and it is doubtful that SADI in its current form adds much to what is already available in the marketplace.
Second, the criteria for receiving SADI support should provide more incentives for collaborative efforts among companies and between industry and academia, with each participant in a funded project being entitled to use resulting intellectual property to advance commercial and research efforts. As noted in the government's Science and Technology Strategy, collaboration is worthy of support because it tends to produce more dramatic innovations in a shorter time, as a result of synergies between different players' expertise and infrastructure. Sharing intellectual property also multiplies the economic benefits produced by joint research, as innovations are adapted and applied in a wide array of areas.
"The Government of Canada will support [science and technology] collaborations involving the business, academic, and public sectors, at home and abroad. Partnerships are essential to lever Canadian efforts into world class successes and to accelerate the pace of discovery and commercialization in Canada. Through partnerships, the unique capabilities, interests, and resources of various and varied stakeholders can be brought together to deliver better outcomes."
Mobilizing Science and Technology to Canada's Advantage, 2007, p. 11.
Finally, there should be a relaxation of limitations on the use outside Canada of intellectual property generated through SADI-supported research. While some measures are appropriate to promote direct benefits to Canadians from SADI-sponsored activity, they need to be better attuned to global production and market realities. SADI administrators already have the ability to loosen intellectual property restrictions on a case-by-case basis, but this is inadequate, as it may lead to inconsistent treatment and the general provisions of the program may discourage applications from companies unaware that tailored approaches are possible or unwilling to deal with procedural hassles. More flexible language needs to be written directly into SADI's terms and conditions.
Recommendation 5: A national initiative to enhance collaboration
As noted under the previous recommendation, collaborative approaches to R&D, as a rule, yield better results for both participants and the economy. This is particularly true for an industry like aerospace, in which R&D is a costly, long-term undertaking. But collaboration often requires a special effort: organizational structures and cultures tend to foster internal cooperation more than collaboration across corporate and institutional boundaries.
Initiatives whose primary mission is to serve as catalysts for collaboration can help overcome these silo effects and promote faster, more relevant R&D. The Consortium de recherche et d'innovation en aérospatiale au Québec (CRIAQ) is a prime example. CRIAQ brings together firms, academics, and research institutions to discuss emerging technological needs and to develop collaborative, open innovation research projects and training to meet those needs.
The Consortium de recherche et d'innovation en aérospatiale au Québec (CRIAQ)
CRIAQ has facilitated many early-stage, collaborative research projects whose results were ultimately transferable to industry. Canadian university students also benefit from the opportunity to work on such innovative research projects.
In one such project, three companies (Bombardier, Bell Helicopter, and Delastek) along with three universities (McGill, Concordia, and the University of British Columbia), the National Research Council, and the Centre de développement des composites du Québec undertook research into the performance and production costs related to the manufacturing of composite airframe structures. The results were used in the design and development of Bombardier's Learjet 85 aircraft and are also being evaluated by Bell Helicopter for inclusion on some existing airframe components and future platforms. Additionally, a prototype tool manufactured by Bell Helicopter is currently in use at Delastek for demonstration trials.
CRIAQ receives funding from the Government of Quebec for its ongoing operations as well as for research projects. At the moment, federal support comes from NSERC and is directed to specific projects. In its current configuration, CRIAQ is largely, though not exclusively, focused on the Quebec aerospace sector. Extending a CRIAQ-based model to the Canadian aerospace sector would offer a competitive advantage to participating organizations and stimulate activity beneficial to the economy as a whole.
This recommendation could be achieved in one of several ways: CRIAQ could be provided with the resources for operational expenses to extend its activities across the country; the mandate of existing initiatives like GARDN could be expanded; or a separate program could be created to complement CRIAQ in other parts of the country. The choice between these options should take into account advice from the Government of Quebec and other provincial governments, industry, and academic and research institutions. Whichever option is chosen, federal support should be conditional on contributions from other orders of government and participating organizations—as is currently the case for CRIAQ—and should be reallocated from the SADI funding envelope. Required federal funding to support operational expenses is likely to be in the order of $2 million per year.
Recommendation 6: Simplification of application and reporting procedures
When firms seek to access funding from government programs, they have to complete application documents, and when they receive support, they must report on how it was spent. Such administrative procedures are, of course, appropriate and necessary to ensure that the public's money is allocated and used in a manner consistent with policy goals. But when the demand for safeguards and accountability creates procedural burdens so high that smaller businesses do not even bother to seek support—as seems to be happening with SADI in particular—the unintended consequences of well-intentioned processes become problematic.
Public policies and programs should not favour companies of any particular size. But neither should they stack the deck against small firms by imposing administrative requirements designed for larger companies seeking higher levels of support.
Such streamlining and simplification should result in increased program uptake by smaller companies, which will help them bring new ideas to market and adapt to competitive pressures. In addition, it should reduce, if not eliminate, the need for smaller companies with limited internal capacity to obtain the assistance of intermediaries. Such middlemen charge a fee to prepare application documents, and their involvement can erode both the impact and credibility of funding programs.
- 4 Data from Industrial Technologies Office of Industry Canada, as of September 30, 2012. (Return to footnote reference 4)
- 5 Review of Federal Support to Research and Development, Innovation Canada: A Call to Action (Ottawa: Public Works and Government Services Canada), 2011. (Return to footnote reference 5)
- 6 Jeff Xi, A Research Assessment Report on Integrated Technology Demonstration and the Role of Public Policy, Ryerson Institute for Aerospace Design and Innovation, July 2012. Research report commissioned by the Aerospace Review. (Return to footnote reference 6)