The federal government’s new defence industrial strategy wants to prioritize Canadian manufacturers and suppliers — but what exactly qualifies as Canadian is “complicated,” experts and the industry itself say.
The $6.6-billion plan unveiled last week aims to boost the number of contracts awarded to Canadian firms to 70 per cent, up from 43 per cent last year.
The strategy itself does not define what qualifies as a “Canadian firm.”
Instead, it focuses on “sovereign capabilities” like aerospace, ammunition and digital services that the government will aim to build in Canada where possible.
A government official told reporters during a technical briefing ahead of the strategy’s public launch that those capabilities “are not defined in terms of Canadian companies or by ownership.”
“They’re really about the capabilities that Canada is seeking to build in Canada,” the official said. “So we would fully expect that any company that is based in Canada with substantive operations here would be in a position to help contribute to the building of that sovereign capability.”
Some of the largest defence companies in Canada are actually subsidiaries of American multinational corporations like Lockheed Martin and General Dynamics. Although the global headquarters for those firms are based in the U.S., the subsidiaries have large production plants and offices in Canada that employ Canadian workers.
That would appear to qualify those companies under the definition of a “Canadian supplier” in the federal Buy Canadian Policy, which the defence industrial strategy seeks to extend into the military production and procurement space.
The Buy Canadian Policy says Canadian suppliers prioritized for federal contracts, in addition to maintaining a Canadian business presence and operations, “will not subcontract work to non-Canadian suppliers or individuals located outside Canada, in a manner that results in minimal value-added activities being performed within Canada.”
The Canadian Association of Defence and Security Industries (CADSI) pointed to that definition when asked about what should qualify as a Canadian firm under the defence industrial strategy, after acknowledging the question is “complex.”
CADSI — which has praised the “ambitious, landmark strategy” as a “historic turning point” — counts Lockheed Martin Canada and the four Canadian subsidiaries of General Dynamics, among other U.S.-related firms, as members.
“Moving forward under the DIS, figuring out what is a ‘Canadian supplier’ will be up to the Government of Canada,” spokesperson Monique Scotti said in an email.
“Industry will expect it to harmonize and be very clear on these definitions, in a way that aligns with degrees of national security and sovereignty that we want to have as a nation.”
Industry Minister Melanie Joly told the Montreal Chamber of Commerce during an event Wednesday that the government’s “objective” is to prioritize Canadian companies where “at least 70 per cent of what they create in Canada are Canadian components.”
She cited Bell Textron in Mirabel, Que., which is also a Canadian subsidiary of a U.S. aerospace manufacturer, as an example.
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“The goal is that we don’t want to be a branch-plant economy on defence” where much of the industrial sector is controlled by foreign companies, she said in French.
But Wendy Gilmour, a former Canadian defence and foreign affairs official who served as assistant secretary-general for defence investment at NATO, said Canada is already in that position.
She said the decade-old Industrial and Technological Benefits Policy, which requires companies awarded defence procurement contracts over $100 million to reinvest the same amount in Canada, has incentivized foreign companies to buy up Canadian defence suppliers to meet that requirement.
The new strategy calls for attracting even more foreign investment by “promoting Canadian defence capabilities” abroad.
“The defence industrial strategy is trying for a pithy, readable document that incorporates this type of complexity,” said Gilmour, who now serves on the board of the CDI Institute.
“To set a one-size-fits-all decision right now would, I think, unduly tie the hands of the government and would not allow the real priority, which I will continue to say until the cows come home: the priority of defence dollars has to be the delivery of defence equipment. And some of that equipment we need yesterday.”
The strategy itself acknowledges that “Canada has a long history of working closely with the United States and looks forward to a continued strong Canada-U.S. defence relationship.”
That history dates back to the Second World War and into the 1950s, with Canadian manufacturers increasingly supplying American defence firms with components and raw materials like steel and aluminum.
The rise of multinational corporations in the 1980s and 1990s saw many of those firms establish Canadian bases of operation — or, in the case of General Dynamics, acquire existing Canadian companies — further blurring the line between what’s considered Canadian and American in the defence industrial space.
Defence industry and policy experts say the strategy’s framework of “build-partner-buy” gives the government “an out” from answering the tricky question of what counts as Canadian.
The framework says Canada will partner with the U.S. and other foreign firms on manufacturing where necessary and purchase outright what it can’t produce at home, with the overall goal of procuring equipment quickly.
“Even with all this new investment, and our domestic capabilities will enhance, there’s going to be limits on what we can do domestically,” said Alex Salt, a post-doctoral fellow at the Canadian Global Affairs Institute’s Triple Helix program.
“There’s still a role for these American-owned subsidiaries in Canada moving forward.”
Although Prime Minister Mark Carney has said 75 per cent of capital spending for defence has gone to the U.S., requiring Canada to pursue a new domestic industrial strategy, Salt said that figure includes contracts going to those Canadian subsidiaries.
“The operational costs of the manufacturing, that’s all staying in Canada,” he explained. “And then some degree of corporate profit on top of that, from what I understand, will then go to the United States.”
Gilmour pointed to the building of Canada’s new fleet of combat vessels at Irving Shipyards in Halifax, using a Lockheed Martin Canada design adapted from a British Royal Navy warship, as an example of the complexities at play.
“The ship design comes from offshore, and most of the battle management systems, the fighting systems, the weaponry on the ships is coming from offshore, but the hulls are being welded and created in Canada. Does that make it a Canadian ship?” she asked.
“It’s a lot of Canadian workers involved, so that’s a good thing. But the intellectual property that supports the design of that ship may or may not be Canadian, and all of the parts and components of it are very unlikely to be owned and operated by Canadian firms.”
The strategy says Canada “will prioritize sovereign control and the development and retention of critical IP” of defence capabilities in partnership opportunities, including with the U.S.
Government officials said at Tuesday’s technical briefing that IP control can be negotiated and that Ottawa has already had some successes with recent procurement contracts, but did not provide details.
Gilmour said those negotiations will be a cost-benefit consideration, and that it will be critical for Canada to prioritize the IP that allows for domestic manufacturing of spare parts for equipment.
“We know this from experience,” she said. “When we sent our Leopard tanks to Afghanistan, we were in trouble for a period of time because we weren’t able to get access to the spare parts to fix them.”
Salt said it will be possible for Canada to negotiate IP control with the U.S., even with “an increased sensitivity about the entire relationship” under the more “reactionary” Trump administration.
That doesn’t mean Canada will have full control of that IP, he added.
“The U.S. has sometimes expressed concern with giving equipment or control of equipment to allies without strict reassurances that they won’t pass on that technology in some other way to a third-party country,” he said.
“The Americans like to keep their stuff in-house … but not to the extent, at least so far, that they would interfere with our military’s usage.”
