Canada Makes Big Investments In Its Defense, U.S. Industry To Benefit

by: Matthew Potter
October 24, 2011

Category: Business Line, Canada, Companies, Contract Additions, Contract Awards, Countries, Events, General Dynamics, IT, Lockheed Martin, logistics, production program, Proposal, Restructuring, Services, Sikorsky, training, United States, UTC | RSS 2.0

Since 9/11 Canada has been one of the most supportive allies of the United States committing troops multiple times to Afghanistan. They have suffered over 150 military casualties and four civilian ones in that fighting. The Canadian government has also made efforts to modernize and equip their forces with better equipment to aid in their operations such as Boeing’s (BA) CH-47 heavy lift helicopters and Lockheed Martin’s (LMT) C-130J transport aircraft.

At the same time both the Liberal and Conservative Party government’s that have been in power since 2001 have planned to improve the nation’s basic armed forces. One of their responses to the world economic downturn since 2008 has been to spend targeted funds on selected military projects to aid the economy and counter unemployment. This has included investments in infrastructure and training capabilities. Canada has benefited from these contracts even when they award them to foreign suppliers, primarily the big U.S. defense contractors, because they have a 100% offset requirement.

This means that the foreign company must invest an amount equal to 100% of the value of the contract in the Canadian economy. This means they may hire Canadian suppliers for parts or maintenance or just do it in a completely unrelated part of the economy. For example Sikorsky Aircraft, part of United Technologies (UTX), sold helicopters to upgrade Canada Navy’s anti-submarine, search and rescue and surveillance capability. The program has seen delays and cost growth and Canada adjusted it by accepting more offsets from UTX.

In this vein the country announced two major contracts this week to continue their improvement of their military. The first is a major new armored vehicle upgrade contract that will go to General Dynamics Land Systems (GD). GD has been building wheeled military vehicles for Canada and the U.S. for several years. This $1 billion contract will allow the current LAV III fleet of vehicles to remain in service for another 20 years by improving armor, weapons as well as survivability against the IED and mine threat. GD is an American company and the contract will help it weather cuts in the U.S. defense budget but it will also help Canada as most of the work will be done in that country and it will employ significant amounts of domestic workers.

Also this week the Canadian government announced the results of a contest among its domestic shipbuilders for contracts to construct a new fleet of large naval combatants and patrol ships. This contract is worth over $32 billion total and was awarded to two shipyards, Irving Shipbuilding Inc. and Seaspan Marine Corp. Irving will build up to 15 warships and 6 patrol craft while Seaspan 8 support vessels such as icebreakers.

While the contract is a huge deal for the nation’s shipbuilders it will have spill over effects into the U.S. Most of the weapons and combat systems will have to be provided by U.S. defense contractors since Canada tends to use their guns and missiles. There is a chance that radar will come from Europe as it has in the past. Either way this is win-win for Canada as they recipients of the sub-contracts will have to invest to meet the offset requirements. This means that billions of dollars will flow back into the Canadian economy one way or another.

Canada has been very proactive over the last decade in their military spending. This has meant not only benefits for their economy but also the U.S. and other countries. There offset policy allows money spent on non-domestic defense goods to grow their economy as well. The U.S. and some European defense contractors also gain as they provide some key components and systems not available on the domestic Canadian market. Canada is able to take advantage of this to gain state-of-the-art, modern equipment without having to build up their defense industry.

Article first published as Canada Makes Big Investments In Its Defense, U.S. Industry To Benefit on Technorati.

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