Defense Contracts Fueling Canadian SMEs: Survey Reveals Generous Revenue Surge
Hundreds of small-to-medium-sized enterprises are planning to pursue opportunities in the Canadian defence sector, while companies already in the industry are increasingly seeking financing in anticipation of significant revenue growth, a new survey finds.
Over the next nine years, Canada must work toward core defence spending of approximately $159-billion to fulfill Prime Minister Mark Carney’s promise to dedicate 3.5 per cent of gross domestic product to that category by 2035, according to the office of the Parliamentary Budget Officer.
If Ottawa follows through on its commitment to buy Canadian where possible throughout this defence buildup, it would translate into a massive opportunity for domestic industry.
However, to meet the demand for modern military technologies and a sovereign supply chain, Canada’s small-to-medium-sized enterprises (SMEs) must scale up, and they’ll need financing to do so.
To parse out what this demand could look like, the Business Development Bank of Canada partnered with Canadian defence innovation network the Icebreaker to survey the ecosystem. Peter Dawe, vice-president of defence strategy at BDC, said what they found reinforces what he’s already hearing anecdotally from clients about the challenges they’re facing.
“There’s a lot to do because it’s clear that the demand is either already present or is coming. The market understands that, and so you’ve got these SMEs doing their best to position themselves to meet the moment,” he said.
Survey responses were collected from 642 businesses, of which 268 are active in the defence sector and 374 are interested in pursuing defence opportunities. The majority of those active in defence are direct contractors, but around 40 per cent are suppliers, meaning they make parts used by defence companies.
Of the 268 businesses selling into defence already, 47 per cent are most active in Ontario and 68 per cent are independent companies with majority Canadian ownership. Roughly 60 per cent have between five and 99 employees.
The survey respondents can be divided into three groups, Mr. Dawe said: those who are firmly entrenched in the industry; those who sell into defence but still garner the majority of their sales from commercial or civilian contracts; and those who are merely considering entering the industry.
Mr. Dawe said each faces its own unique challenges when it comes to scaling, such as hiring staff with defence expertise, finding the capacity for growth and getting the necessary security clearances to operate in the industry.
For example, half of the companies that rely upon defence contracts for most of their revenues are either at capacity or are limited in how much room they have to grow. Yet, roughly half of those companies are still planning a significant level of business investment over the next 12 months compared with the past 12 months, the survey found.
Companies whose defence sales only make up a minority of their revenue have much more capacity to respond to increased demand, signifying an opening to convert more Canadian SMEs into domestic defence suppliers, said Matthew Lombardi, co-founder of the Icebreaker.
“The opportunity is not just, ‘Hey, Canada is going to spend more on defence.’ It’s to actually turn Canadian companies with capability into your own domestic suppliers. We don’t have a shortage of defence SMEs, we have a conversion problem,” he said.
About half of the SMEs surveyed, no matter how much of their revenue comes from defence, are planning to ask for financing over the next 12 months to help meet that demand, according to the survey. Most of them said they will be seeking equity, working capital loans and lines of credit.
Again, Mr. Dawe said these responses didn’t come as much of a surprise. Rather, they reinforced what BDC has already set in motion through its $6-billion defence platform dedicated to financing, advisory services, venture capital and other indirect investments.
However, even with BDC’s burgeoning interest in defence and some initial support shown by the country’s Big Six banks, about half of defence SMEs still anticipate difficulty in their quest for financing.
Concerns about risk-averse lenders and market uncertainty are the primary reasons businesses cited for their hesitancy, the survey found. Mr. Dawe said this is understandable, given Canada’s defence industry likely has some “permanent scar tissue and healthy skepticism” about the country’s financial institutions changing their tune after years of exclusion.
For BDC, he said, it’s “not an easy thing to strike that balance in terms of doing what’s right for the ecosystem, what’s right for government and what’s right as a development bank.”
The bank will share the results of the survey with its partners and fellow Crown corporations, as well as use it to reinforce its work moving forward, Mr. Dawe said. For example, it will be a helpful reference point for BDC as it embarks on a matchmaking program that he said aims to link Canadian SMEs with larger defence companies.
This article was first reported by The Globe and Mail
