Industry at the crossroads: Canada's top arms contractors.

The latest ranking of Canada's largest military contractors illustrates the shift in markets for Canadian arms since the end of the Cold War. Although US orders were significant during fiscal year 1993-94, Canada's military export market was no longer dominated by the Pentagon contracts that in the past provided more business to Canadian military contractors than all other sources, including the Department of National Defence (DND). Instead, in 1993-94 DND contracts and non-US export contracts propelled companies to the highest ranks of Canadian arms suppliers.

Table 1 details Canada's top 20 military equipment prime contractors during 1993-94. From the table's first column, which denotes the company's rank within DND contractors, it is apparent that most suppliers owed their overall position to DND contracts during the year. Nine of the year's top 10 military contractors were also in the top 10 DND positions. In contrast, as shown by the table's second column, only one of the largest 10 Canadian suppliers to the Pentagon in 1993-94 was also in the highest 10 overall ranking. The company with the largest Pentagon order for the year, Remcor (138170 Canada) of Chambly, Quebec, was ranked fourteenth in the composite standings.

The reduced impact of Pentagon orders on the balance sheets of top arms manufacturers mirrors the general decline in Canadian prime military exports to the US since fiscal year 1985-86. The Reagan-era arms boom that brought a dramatic rise in Canadian military exports to the US during the early 1980s went into reverse by mid-decade and the subsequent decline in Pentagon spending on new equipment, combined with increased US protectionism as its domestic military industry restructured, resulted in the smaller US orders for Canadian military suppliers, as reflected in the latest contract standings. Some companies, such as Litton Systems Canada and Canadian Marconi that featured prominently in earlier major contractor rankings because of large US orders, do not appear in the latest top prime contractor list. More generally, the trend is marked by the declining number of top 10 Pentagon contractors in the overall contractor ranking. Whereas six of the largest 10 Pentagon suppliers were ranked within the top 10 overall military prime contractors for the period 1986-88, the number dropped steadily to one by 1993-94.

In 1993-94, overseas export orders influenced the highest Canadian military contractor rankings more than Pentagon contracts. As seen in Table 2, the two largest, and four of the five largest, reported military export contracts were awarded by non-US customers. The largest export contracts, orders for GM Canada's light-armoured vehicles (LAVs) from Saudi Arabia and Bell Helicopter Textron's transport helicopters from Thailand, originated in the Southern regions of highest military spending, the Middle East and Southeast Asia. Other major export orders for the year came from within the more traditional European and OECD markets, the Netherlands, and Australia.

The largest DND contracts for the year, listed in Table 3, drew on the broader capacities of the Canadian military industry. The year's biggest contract, a $403-million order within the $883-million Lynx replacement project, requires the manufacture of over 200 LAV chassis by General Motors' Diesel Division in London, Ontario, the same plant that is exporting LAVs to Saudi Arabia and Australia. SNC Industrial Technologies in Montreal won several contracts totalling $176-million to provide a range of munitions for the Canadian Armed Forces (CAF). Other major DND contracts included the repair and overhaul of CAF equipment by Bombardier Canadair and Bristol Aerospace as well as the production of sophisticated electronic systems by Lockheed Canada (now Lockheed Martin Canada) and Hughes Aircraft.

[Part 1 of 2]

      Table 1: Top 20 Canadian Military Prime Contractors FY 1993-94

    Company head office/main plant       A   B   C    D     E     F     G

1. General Motors of Canada Ltd.,        1
   Diesel Division, London, Ontario

2. SNC-Lavalin Group, Montreal           2

3. Lockheed Canada Inc., Kanata,         3
   Ontario

4. Bell Helicopter Textron Canada Ltd.,          11
   Mirabel, Quebec

5. Computing Devices Canada Ltd.,        4   18  24
   Ottawa

6. Bombardier Inc., Montreal             5   11  3

7. Unisys GSG Canada, Montreal           6       12

8. Bristol Aerospace Ltd., Winnipeg      10  7

9. Hughes Aircraft Canada Ltd.,          7
   Calgary

10. CAE Inc., Toronto                    8       5

11. Peacock Inc., Montreal               9

12. Devtek Corporation,                  25      16
    Markham, Ontario

13. General Electric Canada Inc.,        11
    Mississauga, Ontario

14. 138170 Canada Inc.,                      1
    Chambly, Quebec

15. Allied-Signal Canada Inc.,           12  21  6
    Etobicoke

16. Saint John Shipbuilding Ltd.,        13
    Saint John

17. IMP Group Ltd., Halifax              15

18. Honeywell Inc., Toronto              14

19. Spar Aerospace Ltd.,                 16      8
    Mississauga

20. Liftking Inc.,                           2
    Woodbridge, Ontario

Total

[Part 2 of 2]

      Table 1: Top 20 Canadian Military Prime Contractors FY 1993-94

    Company head office/main plant       H   Total

1. General Motors of Canada Ltd.,        4     706.1
   Diesel Division, London, Ontario

2. SNC-Lavalin Group, Montreal           5     189.3

3. Lockheed Canada Inc., Kanata,         2     179.3
   Ontario

4. Bell Helicopter Textron Canada Ltd.,  1     149.7
   Mirabel, Quebec

5. Computing Devices Canada Ltd.,        2     146.4
   Ottawa

6. Bombardier Inc., Montreal             1     138.8

7. Unisys GSG Canada, Montreal           2      82.5

8. Bristol Aerospace Ltd., Winnipeg      1      81.3

9. Hughes Aircraft Canada Ltd.,          2      79.5
   Calgary

10. CAE Inc., Toronto                    1      74.3

11. Peacock Inc., Montreal               3      73.8

12. Devtek Corporation,                  5      64.8
    Markham, Ontario

13. General Electric Canada Inc.,        1      57.1
    Mississauga, Ontario

14. 138170 Canada Inc.,                  4      41.0
    Chambly, Quebec

15. Allied-Signal Canada Inc.,           2      34.2
    Etobicoke

16. Saint John Shipbuilding Ltd.,        3      31.7
    Saint John

17. IMP Group Ltd., Halifax              1      31.4

18. Honeywell Inc., Toronto              2      30.6

19. Spar Aerospace Ltd.,                 1      29.2
    Mississauga

20. Liftking Inc.,                       4      22.4
    Woodbridge, Ontario

Total                                       $2,243.4
            Top Canadian Military Prime Contractors FY 1993-94

Legend

A  Ranking within top 25 Department
   of National Defence prime contract
   recipients in Canada for the period,
   fiscal year 1993-94.
B  Ranking within top 25 US Department
   of Defense prime contract recipients
   in Canada for the period.
C  Ranking within top 25 Defence
   Industry Productivity Program
   recipients for the period.
D  Estimated or reported military sales
   greater than 50% of total sales.
E  Estimated or reported export sales
   greater than 50% of total sales.
F  Reported military sales or deliveries
   to one or more Third World countries
   during the period.
G  Foreign-owned or controlled.
H  Commodity-classification of major
   military products (1-Aerospace;
   2-Electronics; 3-Marine;
   4-Transportation; 5-Armaments;
   6-Industrial; 7-Data Processing;
   8-Research and Development; 9-Miscellaneous).
I  Total value of reported prime contracts
   during the period in $millions.

Note: The figures here may be less than total military sales (see
Methodology note).

[Part 1 of 2]

      Table 2: Reported Major Prime Military Export Contracts 1993-94

Company                  Contract

GM Canada                Light-armoured vehicles

Bell Helicopter Textron  Bell 212 transport helicopters

Devtek Corp (Diemaco)    C-7 assault rifles

138170 Canada (Remcor)   M969 semitrailers for tank transport

GM Canada                Light-armoured vehicles

Liftking Inc             Forklift trucks for shipboard use

Computing Devices        M1A1 tank fire control system upgrades

[Part 2 of 2]

      Table 2: Reported Major Prime Military Export Contracts 1993-94

Company                        Amount      Customer

GM Canada                $272,620,624  Saudi Arabia

Bell Helicopter Textron  $146,231,699      Thailand

Devtek Corp (Diemaco)     $53,265,168   Netherlands

138170 Canada (Remcor)    $41,044,131       US Army

GM Canada                 $24,345,242     Australia

Liftking Inc              $14,487,169       US Navy

Computing Devices         $11,300,000       US Army

In spite of the shift in the origin of the largest military contracts, the membership of the top contractor ranks remained quite stable in 1993-94. Only two of the year's largest contractors were not ranked within the top 20 at least once since 1981-82, with 12 appearing in all, or all but one, of intervening top rankings. The stability suggests that the majority of Canada's military contractor elite to date have successfully weathered the passage to the more competitive post-Cold War environment. Indeed, largely due to continuing high DND capital spending, the upper echelon of Canada's "defence industrial base" looks much the same as it did at the height of the Cold War.

During 1993-94 Canada's military production continued to be concentrated in the plants of the top 20 prime contractors. Although down from a year earlier (see Ploughshares Monitor, March 1995), the 70.8 percent of total DND and export prime contract value awarded to the top 20 ranked companies reinforced the dominant positions of relatively few companies. Since prime contracts for military equipment were awarded to close to 1,000 other companies during the year, more than two-thirds of the marketshare was captured by about two percent of the suppliers. The concentration was even higher within the export sector; more than three-quarters (77.3 percent) of the value of reported prime military export contracts went to the top 20 contractors.

Methodology

Table 1 was compiled from information contained in Project Ploughshares' Canadian Military Industry Database and its background company files. Rankings are based on public-domain listings of unclassified prime contracts. These are contracts awarded by the Department of National Defence, military export contracts arranged by the Canadian Commercial Corporation on behalf of foreign governments, and Pentagon contracts placed directly with Canadian companies. Together they represent approximately nine-tenths of all Canadian military production. Defence Industry Productivity Program information was obtained from Industry, Science and Technology Canada (now Industry Canada).

Prime contracts are contracts between Canadian companies and governments. In general, they represent agreements rather than deliveries (which tend to be represented by sales) and may call for several years' production. The table does not include company sales that arose from prime contracts awarded during earlier periods. Subcontract information (that is, contracts awarded to Canadian companies by military prime contractors) is not included in the table for two reasons. First, domestic subcontract figures are included in Department of National Defence (DND) prime contract awards. Hence, major military subcontractors are not ranked even though their sales may be within the range of the table. Second, and more significant, because Ottawa does not fully disclose military export details, information on subcontracts placed with Canadian companies by foreign military contractors is not available.

The Canadian Commercial Corporation defines military equipment contracts for which it is responsible as contracts between Canadian equipment suppliers and military customers. This definition (which Project Ploughshares generally supports) differs from the definition of "military goods" used by the Department of Foreign Affairs. The latter is based on a list of technically defined equipment that is determined independently of the user. As a result, some export contracts (most notably the sale of helicopters to military customers), defined as military by the Canadian Commercial Corporation, are classed as civilian by the Foreign Affairs Department. Hence, the table includes contracts that would not be reflected in the Department's annual report on the export of Canadian military goods.

Reshaping the industry

The composite profile of Canada's top military contractors is changing. The drop in export sales to the Pentagon - a trend that may level off but is unlikely to reverse - inevitably must alter not only the market but also the products of an industry that has traditionally looked to the US for leadership and sales. In addition, 1993-94 figures illustrate the greater importance of non-US exports as the industry and government pursue overseas customers, particularly in Third World regions. Yet, the intense international competition for such sales, combined with other factors such as the growing capacity of arms recipients to produce their own weapons, point to future Canadian non-US export sales that will be at best volatile, and likely will decline. These changes suggest that Canada's future major military manufacturers will grow more dependent on domestic procurement. As a result, Ottawa's military policy and spending plans likely will have a greater influence on the size and nature of the production of Canada's largest arms manufacturers as well as the industry as a whole.

Growing industry dependency on domestic orders, together with the concentrated and relatively stable nature of Canada's major arms producers, place the Canadian government in a good position to shape and direct a contraction of Canadian military production. Necessary cuts to Canadian military spending (see pp. 9-10) could include a program of planned reductions in capital equipment procurement that eases Canadian companies out of dependency on military sales (and especially military export sales) by focussing on the relatively few companies where most military contracts are concentrated. The task is made easier by the existing diversity of the top contractors' customer base - for example, column D of Table 1 shows that only one-quarter of the largest companies have reported military sales worth more than half their total sales. With the majority of Canada's largest military manufacturers already dependent on civilian orders for the larger portion of their sales, the task of shifting from military to civilian production is unlikely to require major restructuring.

In addition, 1993-94 results show that some of the capacities of the top manufacturers could be retained to support the peacekeeping and other non-combat roles that are more appropriate for Canadian troops in an evolving security context. Adaptable LAVs and utility helicopters, training systems, and the ability to repair and overhaul equipment will be needed for future multinational peacekeeping commitments or domestic surveillance and seach-and-rescue operations that should be the central missions of Canadian forces in a post-Cold War environment. A planned downsizing of Canadian military production might retain the capacity to provide these products or services while phasing out manufacturing for combat systems, beginning with foreign combat equipment like the M1A1 tank that is not found in Canadian materiel. The challenge will be to prevent export sales of "peacekeeping" equipment like the LAV to governments (like Saudi Arabia) where the risk is high for its use in combat or against civilian populations.

[Part 1 of 2]

Table 3: Reported Major Department of National Defence Contracts 1993-94

Company                      Contract

GM Canada                    Light-armoured reconnaissance vehicle chassis

SNC Industrial Technologies  Ammunition

Lockheed Canada              Airborne electronic support & training system

Bombardier (Canadair)        Repair & overhaul of CF-18 fighter aircraft

Hughes Aircraft              Military automated air traffic system

Bristol Aerospace            Repair & overhaul of military helicopters

[Part 2 of 2]

Table 3: Reported Major Department of National Defence Contracts 1993-94

Company                            Amount

GM Canada                    $403,101,366

SNC Industrial Technologies  $176,026,201

Lockheed Canada              $137,419,597

Bombardier (Canadair)         $88,565,642

Hughes Aircraft               $75,568,750

Bristol Aerospace             $43,032,300

The latest ranking of Canada's top military contractors portrays an industry at the crossroads. The reduced impact of US contracts in the 1993-94 standings demonstrates the industry is a long way from the flush Reagan years to which it can never return. By turning to the overseas orders that were prominent in 1993-94, the industry and the Canadian government risk being drawn further into sales to questionable regimes or unstable regions. By turning to greater dependency on traditional sales to the Canadian Forces, the dominant source of contracts for the year, Canadian military manufacturers will become more vulnerable to unforeseen budget cuts or to declining demand for equipment for unnecessary military roles. All existing paths are strewn with the hazards of unavoidable trade-offs between maintaining jobs and meeting budgets or arms control standards.

Instead, a new path is needed. One constructive option would be a government procurement program that seeks to contract and reshape the domestic industry by reducing export dependency and altering production to better service a Canadian military mandate in keeping with a broader view of security.