New study makes case for major public and private R&D increases for aerospace sector

Deloitte & Touche report

The Canadian aerospace industry will require significant increases in public and private R&D if it is to maintain or increase its global market share in the face of increasing competition from established and emerging markets, says a major new report commissioned by the Aerospace Industries Association of Canada (AIAC). The report by Deloitte and Touche LLP (D&T) estimates that R&D funding from private and public sources must increase between $1 billion and $7 billion by 2020 to staunch or reverse the drop in R&D intensity which has plummeted from 12% in 1997 to just 6% in 2009.

Under a labour-intensive scenario, R&D needs to increase by $1 billion to boost civilian market share from 10% to 14% and military market share from 2% to 3%. Under a capital intensive scenario, R&D investment would have to jump by $7 billion to increase civilian market share from 10% to 20% and military market share from 2% to 4%.

The economic downturn has had a major negative impact on aerospace sales. In 2009, revenues stemming from the Canadian aerospace sector declined 6% from the previous year from $23.6 billion to $22.2 billion, with roughly corresponding declines in exports and employment.

R&D outlays have also dropped, as demonstrated by recent data compiled by Research Infosource, a sister company to RE$EARCH MONEY. That data show that just five firms placed in the Top 100 Corporate R&D Spenders list.

Canada's top-ranked aerospace firm — Pratt & Whitney Canada Ltd (P&WC) — saw a drop 10% in its R&D expenditures in 2009 to $398 million, well off its high of $481 million in 2006, despite major public investments in is R&D projects. Bombardier's R&D spending also dropped — 11.7% to $161 million, while CAE Inc's expenditures increased 7.5% to $121.6 million.

The D&T report argues that a direct correlation can be made between the R&D intensity and overall R&D spending by the aerospace sector and growth of market share, jobs and export revenues. It outlines three scenarios of what government and industry must spend on aerospace R&D in the coming years to either maintain, increase or experience a decline in market share.

"Public sector aerospace R&D investment and involvement is critical because of the aerospace industry's high R&D intensity. Suppliers must invest heavily to develop the technology required to position themselves for the next generation of aircraft platform," states the report. "This is particularly crucial because of the long period between platform refreshes and the relatively small number of aircraft platforms in production at any given time. The level of competition in the regional aircraft market means that innovation will be critical to Canada's success."

"Canada's sales growth may be a result of weakness in R&D investment in which Canada also ranked poorly. Canada's R&D investment intensity lags behind France and Germany and is in line with the US … France and Germany both put a high level of importance on R&D spending in order to maintain their leadership position in the industry. France and Germany also have strong Space sub-sectors and this may be a by-product of their focus on R&D investment." — Deloitte & Touche

To increase market share, R&D investment would have to increase by $1.8 billion, with $1.5 billion from the private sector and $300 million from public sources. Under this level of investment, market share could be expected to grow 10%, increasing R&D intensity to pre-1999 levels.

Far greater investments would be required should Canada wish to match the US in terms of the public share of aerospace R&D funding (72%). Public sector sources would have to boost their R&D investments by $1.3 billion under a status quo scenario; an amount that jumps another $1.9 billion in order to match the R&D intensity of the US aerospace sector (10%) (see chart).

Compared to competing, Canada's public funding of aerospace R&D is extremely low, reflecting the lack of a strong military component to the sector and a decline in direct support for business R&D under the current federal government. The Strategic Aerospace Defence Fund (SADI) has provided $420 million in funding since its inception in 2007, an amount not much larger than the last investment P&WC received from Technology Partnerships Canada ($350 million) before its replacement by SADI (R$, December 22/06).

Other government programs that provide aerospace R&D funding are the National Research Council's Institute for Aerospace Research ($26.5 million) and the Green Aviation R&D Network (GARDN) ($21 million between 2010 and 2013). In contrast, Germany's Ministry of Economics and Technology has committed $382 million to aerospace research between 2009 and 2013.

Anemic public support has translated into low marks for a global report card prepared in late 2009 for AIAC by AeroStrategy Management Consulting. The discussion paper gave Canada an ‘A' for aerospace sales but assessed straight ‘C's for sales growth, R&D intensity and public R&D investments. Canada's government programs and exports were assessed ‘D's.

emerging competitors

In addition to intense pressure from traditional competitors, Canada and other nations with advanced aerospace sectors are facing new competition from emerging countries. Brazil has long been a competitor to Canada in the regional aircraft market but nations such as China, India, Russia and even Singapore are stepping up investments and public support.

Singapore has built up a significant industry for aerospace maintenance, repair and overhaul and is now moving into design and manufacturing, attracting several leading aerospace companies to establish R&D centres.

R$