From Defence Industrial Strategy to Reality

Industry needs a buyer and the government must dodge obstacles

Canada’s 2025 budget lays out significant defence spending increases. The budget also provides an ambitious plan to grow the Canadian defence industry. We’ll soon learn more about this Defence Industrial Strategy when the full version is released. In this post, I’ll discuss steps required to realize the government’s ambitions for the defence sector and what obstacles lie ahead, with some bold text to help those who want to skim.

To achieve the government’s defence industrial aims, the Canadian Armed Forces (CAF) must buy what Canadian industry is selling. This can’t be a series of one-offs either. Canada’s government must provide industry with a consistent demand signal over several decades.

Why is this important? Because many in industry won’t invest, or ‘catalyze’ on government investments, unless they know there’s a buyer. I know this is elementary, but it bears repeating, if only to stamp out magical thinking. An industrial strategy that focuses on the supply side, i.e. encouraging businesses to grow and innovate, won’t cut it. Businesses need to know that there’s a long-term customer. Some companies may choose to go full Field of Dreams --thinking that if they build it, the government will come. Most firms, however, want to know that Canada might buy it before they build it.

How does the government ensure that the CAF will buy more from Canadian industry? First, Canada needs an updated defence policy. Defence policy directs the CAF to undertake and prepare for specific missions. The military then takes those missions and crafts procurement projects, programs, and technical requirements. These, in turn, provide industry with a demand signal. If a defence policy is clear enough, moreover, it can provide industry with enough confidence to invest. The policy can tell industry that the government will be expecting the CAF to have certain capabilities, and industry can then start building them.

What else? The government must pursue real capability research and development partnerships with Canadian firms, big and small. This means instructing the Department of National Defence and CAF to work closely with Canadian companies and innovators to research, develop, and build the capabilities that the military will need. As importantly, DND/CAF must be able to rapidly acquire the capabilities that it has developed as part of these partnerships. Right now, DND/CAF works with industry to develop some niche capabilities, but it can’t easily acquire them once the development is done. This needs to be fixed immediately.

These partnerships, moreover, need to include frameworks for continuous technological improvements and sustained acquisitions. It’s not enough to develop and buy a capability once. If we really want industry to invest and innovate over several decades, then we need to give DND/CAF frameworks and authorities to regularly buy the latest versions of the capabilities companies are producing. When it comes to advanced technologies, in fact, the CAF should be able to acquire new capabilities from its industrial partners at the same rate that the average consumer buys a new laptop or smartphone. I can hear the procurement boffins scoffing at this, but we need the right incentive and profit structures –not to mention the best equipment to meet emerging threats.

Canada needs a more robust defence export plan as well. The CAF can only buy so much. Most Canadian defence companies will have to sell elsewhere to thrive and grow. Ottawa must help them do so. The Canadian Commercial Corporation already plays this role, but it will need to be better resourced to do more as the defence sector grows. We should also conduct a review of Canada’s defence export controls. This review should ask whether our export controls align with our goal to grow the Canadian defence industrial base.

Perhaps most controversially, the Canadian government should be prepared to keep some defence companies on life support when there is limited demand for their goods. I get that this is a tough sell in a country that loses its mind over the cost of an orange juice in London. If you’re serious about sustaining certain essential sovereign capabilities or a larger defence industry over time, though, the government may need to step in and keep the lights on.

Ottawa should further be mindful of the obstacles its defence industrial strategy will face.

American capability is prized by the CAF. The United States develops and operates the most advanced military capabilities in the world, and the CAF is expected to seamlessly interoperate with the American military in North America and overseas. From a CAF perspective, it makes sense to acquire advanced American capabilities that ensure an operational advantage over adversaries, seamless interoperability with the United States, and increasingly, interchangeability with American and other allied forces. This worldview, however, does not align well with an emphasis on buying Canadian.

The current debate over the acquisition of an Airborne Early Warning and Control aircraft is a case in point. The Carney government promised to buy a Canadian AEW&C plane, which would mean a Bombardier jet equipped with a mission system developed by another firm, such Saab or L3Harris. The CAF, however, wants the Boeing E-7 Wedgetail AEW&C. Since a Canadian AEW&C capability would play a prominent role in the binational Canada-United States North American Aerospace Defence Command, the CAF will find all sorts of ways to argue that the Boeing plane is the optimal choice, if not the only one. I suspect the Trump administration is telling Canada the same, and perhaps not very nicely.

AEW&C will be an interesting test. If the Carney government accepts the CAF’s arguments and doesn’t go with Bombardier, despite promising to buy Canadian, and despite the fact that many NATO allies have acquired AEW&C capabilities that rely on the Bombardier airframe, it could cast doubt on fundamental tenets of the defence industrial strategy. If the government isn’t willing to invest in Canadian industry in this case, how confident will investors be about promises to support Canadian companies in other instances? The CAF, furthermore, may walk away from the experience still more emboldened to resist government pressure to buy Canadian, particularly when there’s a more advanced or interoperable American capability available.

Problematic foreign buyers are another obstacle. Canada’s allies may buy more Canadian defence capabilities in the future, but they have their own domestic industries that they’re trying to support. A growing Canadian defence sector will invariably look beyond allied countries for potential customers. This may mean exporting more military capabilities to regimes that do not share Canadian values. The Canadian government should figure out how to better handle this issue, and the controversies that routinely surround it, before defence exports increase.

Public fickleness presents yet another potential challenge. Support for increase defence spending is highest among Liberal voters. That’s unusual and should lead us to be cautious about the firmness of this support. Liberal voters currently endorse major investment in the defence industry because the Prime Minister has told them these are essential for Canadian sovereignty and economic prosperity. That support needs to gel and endure beyond Carney’s premiership. It will also require convincing Conservatives who are focused on balanced budgets and lower taxes to follow through on these defence industrial investments when they next form government.

The external environment will be a critical factor here. If the war against Ukraine continues, Russia keeps testing NATO, China appears poised to invade Taiwan, and the United States continues to squeeze Canada economically, support for defence investments will be easier to sustain. But we shouldn’t underestimate the allure of going back to free riding if these external conditions become less perilous.

This brings us to the strategy’s sequencing challenge. The defence industrial strategy must deliver real economic results before the everyday Canadian voter returns to their view that defence spending is an (un)necessary evil. I’d further argue that the promise of defence-driven economic prosperity has to be realized before the Carney government loses that new government smell. Voters, and Liberal voters in particular, are putting a lot of faith in the Prime Minister’s defence industrial vision. That faith may be shaken if the vision doesn’t live up to its promise soon.

Finally, the government must beware of faux defence industrial nationalists. Maple washing isn’t only happening in the grocery aisles. We also see it among defence firms, be they big multinationals or plucky start-ups. If enough of these companies soak up Canadian government money, then decamp to the United States in search of bigger profits, expect the political and public mood to sour on defence industrial policy. The government should be thinking of ways to keep these companies truly invested in Canada, lest we end up in the defence version of the EV battery situation.

In sum, the Carney’s government’s defence industrial strategy is bold and ambitious, but it must be accompanied by significant policy changes to succeed.