Change in the US Defence Market: Perspectives for Canadian Defence Suppliers
In light of the ongoing pandemic and the US election, Avascent team members Douglas Berenson and Michael Petric shared insights on the future of Canadian defence suppliers in the US market at the Canadian Association of Defence and Security Industry Association’s (CADSI) Small and Medium Enterprises Day, and Canada Economic Development for Quebec Region’s 2020 Symposium on the Canadian Defence and Security Market.
These insights pose a series of questions for leaders in Canada’s defence and security industries that are active in the United States.
There are no two countries on earth that share closer defence ties than Canada and the United States. The two nations pursue long-standing continental defence cooperation under the North American Aerospace Defence Command (NORAD).
Canada is one of the so-called Five Eyes countries with whom the United States engages in unusually close intelligence information sharing. Canada and the United States are NATO allies, and have a long history of working together and fighting side-by-side.
Canadian firms enjoy a privileged position in the US defence market due to their inclusion in the National Technological Industrial Base (NTIB) that is recognized by both the United States and Canada.
Still, for Canadian defence firms seeking opportunity in the US market, there are significant challenges ahead.
- A flattening of the DoD budget,
- Changes in acquisition process, and
- The sharp rise of protectionism in the United States
These challenges will present Canadian firms with more daunting prospects. Corporate leaders, even those whose firms have found success among Pentagon customers, must ask a number of questions raised by emerging conditions in Washington.
How well do you understand customer demand?
After a period of rapid growth in 2018 and 2019, the Defense Department budget has flattened and could see a real decline in real buying power through the mid-term.
Rising concern for the Federal budget deficit, a desire to shift emphasis to non-defense priorities will combine to create austere conditions in DoD for the foreseeable future.
This will require that DoD make a series of difficult trades among force size, readiness and modernization. The Biden Administration will undertake a comprehensive strategy review in 2021. But the threat picture in the Pacific, European and Southwest Asian theaters have not changed materially, even if leadership in the White House has.
Indeed, the coronavirus pandemic has, if anything, allowed China to expand its power and influence, relative to its neighbors and to the United States.
This means that even DoD activities and projects that have enjoyed strong customer support could be under pressure.
Conducting a cold-eyed assessment of the probability that key sources of revenue will continue is a necessity.
Are the acquisition processes you’re used to engaging now subject to change?
The Defense Department has been increasingly using non-traditional practices and channels to:
- Acquire and
- Sustain defense capabilities
These changes are aimed at achieving a variety of objectives. These include reducing cost and speeding cycle time from requirement to fielded solution.
But most importantly, these changes are aimed at introducing the dynamism and innovation of commercial technology marketplace into defence procurement.
Only by mirroring the pace and competitive instincts of the commercial sector can DoD ensure that it out-innovates rising adversaries.
DoD is increasingly relying on prototyping contracts of limited duration to experiment with alternative designs.
The Department seems increasingly drawn to test out commercial technologies and new designs in a relatively compressed timeframe. Many of these initiatives have limited, if any, expectation of serial production.
The Pentagon is increasingly emphasizing software development and maintenance practices that may confer less long-term incumbency to contractors.
Many DoD agencies are increasingly looking to recompete production and sustainment work on systems for which the Department owns the intellectual property.
All of these (and other) measures are changing the fundamental assumptions for contractors about how they generate revenue, profit and future competitive advantage.
Can a Canadian firm remain competitive in this new environment?
Of particular concern to Canadian firms, we are seeing a rise in protectionism in US defence procurement.
While Canadian firms still retain important prerogatives as members of the NTIB, there is little doubt that concerns for supply chain security and economic nationalism could make the Pentagon a more difficult customer to engage.
The 2021 National Defense Authorization Act, an annual defence policy measure passed by Congress, included a tightening of domestic content restrictions on major production programs.
While the NDAA had yet to become law by mid-November 2020, this issue remains a live one for many members of Congress in both parties.
In his campaign for president, Joe Biden advocated somewhat vaguely in favor of stronger protections for US companies in defence procurement.
The Biden administration could reconsider how to implement this instinct, especially given the priority it will place on engagement with US allies who were alienated by the Trump administration.
But regardless of how these policies are settled in statute and in regulation, what often matters most is the perception of individual contracting and program officers.
The belief that Canadian sources should be considered out of bounds in US defence procurement is an insidious one, which requires constant vigilance, education and persuasion to overcome.
Canadian firms have important allies in this effort, in the form of the:
- Trade Commissioner Service,
- Defence Attaché Network,
- International and Industry program division at National Defence, and
- Canadian Commercial Corporation