Canada needs to overcome a “three-speed” growth divide among small- and medium-size enterprises (SMEs) as it ramps up spending to build its defence industrial base, according to a new study.
A report released Thursday by the Business Development Bank of Canada (BDC) and The Icebreaker, an SME defence innovation network, said there is a “rare window of opportunity” for Canadian companies in the defence ecosystem but their growth is uneven due to the sector’s high barriers to entry and complex requirements.
BDC surveyed 642 business owners and decision makers who are active in the defence sector. Their companies were categorized into three groups: defence-heavy and actively growing; defence-light and expanding cautiously; and in “exploration mode” and interested in joining the sector.
SMEs are the “backbone” of Canada’s defence industry, said Peter Dawe, BDC’s vice-president, defence strategy and a retired major-general in the Canadian Armed Forces. According to BDC data, SMEs make up 92 per cent of businesses in the sector and account for 40 per cent of employment.
But companies looking to enter the defence space face the steepest barriers compared to more established ones, the report said.
“If you’re new to the defence business, it can appear pretty daunting,” Dawe said. “It’s hard to decipher. And the hurdles to gain access seem pretty significant.”
The report said each of the three groups face different challenges depending on their level of involvement in the defence sector, including long sales cycles, maintaining sufficient cash flow and difficulty hiring or retaining skilled workers.
But firms already active in the space do share a commonality: 29 per cent of defence-light and 28 per cent of defence-heavy firms said meeting “defence-specific requirements” is limiting their growth over the next 12 months.
“There are specific certifications that need to be met, like cyber, for example,” Dawe said. “Secondly, as warfare and military-related technologies continue to evolve, we’re seeing a greater requirement for security classification s to be able to operate in this space, and that too tends to be difficult to secure.”
With a high bar for entry into the defence space, Dawe says BDC plays an important advisory role to SMEs in “demystifying” the procurement process.
“Having a better understanding of what those requirements are and proactivity by SMEs is especially important because you don’t want that to be the constraint,” Dawe said.
Accessing capital is also a challenge, as “financial institutions remaining cautious about the risk profile, limited customer base and unstable cash flows of the sector,” the report said. BDC’s survey found that half of defence SMEs looking for financing over the next 12 months think it will be difficult.
“The challenge in many cases is that (the companies) don’t necessarily have a contract in hand , but they see the demand coming, and in order for them to be able to meet that demand and participate in supply chains, they need to be able to scale,” said Dawe.
Seventy-six per cent of businesses surveyed by BDC are involved in international trade, a necessity given Canada’s relatively small defence market. For companies to “thrive and survive” in the long term, Dawe said they need access to other countries.
“Historically, that’s primarily been south of the border, which will continue to be a very important market to us,” he said. “But as we’ve seen recently, it’s important to have a variety of opportunities. It’s clear that our government is leaning towards a closer relationship with Europe.”
Dawe said BDC is pursuing a “matchmaker initiative” to help source SMEs and connect them with government defence projects . He said opportunities could include a mix of traditional domains like land, air and sea, and emerging ones such as cyber and space.
“We have the relationships with the (primary contractors). We have the relationships across government,” he said. “We have a pretty clear line of sight in terms of what the broader governmental aspirations are looking like.”
• Email: jswitzer@postmedia.com