I'm Mike Abbott, partner at BDO.
Gonna answer some Q&A today on defense spending.
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What's driving new companies to enter the defense supply chain today?
In Canada, there's really two main drivers for why companies will enter the supply chain. Number one is our commitment to achieve 5% of GDP for our NATO commitments. That's number one.
Number two, there's a large push for Buy Canadian, and it's an opportunity to increase and expand the defense sector and all of the industries that support the defense sector in Canada.
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Where do you see the biggest opportunities for businesses that want to compete in the defense space?
This is a tough question to answer because the Department of National Defense tracks over 150 defense capabilities that they seek to acquire through domestic or international partners.
So the biggest opportunities that I believe will exist for Canadian companies is entry into the supply chain. Traditionally, Canada has bought from global partners and a limited number of suppliers here in Canada. Over the next 10 years, to meet those defense spending commitments, the opportunities will be right across the entire supply chain.
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Why does being a better operator matter so much in defense compared to other industries?
Today, the defense sector is incredibly competitive. It's very regulated through procurement, and as a result, margins tend to be very substantial.
There are multiple tiers of vendors that exist in the supply chain. You have Tier 1 vendors that own the contracts with the government. In many cases, they will engage Tier 2, 3, and 4 vendors. What happens is margins come out at each level.
So if I hire a second-tier firm to help me satisfy whatever I'm delivering to the government, there's a portion of that profit that does not flow down. As a result, you have to be very, very good at operating. You have to be able to drive margins, which will make you more competitive to win the work.
It's incredibly important in this space because it's hard to get in. It's a very limited number of organizations that have entered this sector in Canada, so you have to be very good at operating.
What are some of the most common regulatory or compliance issues companies underestimate when entering defense?
This is a tough one.
The main regulatory compliance considerations that any organization has to think about all flow from procurement. You have to comply with what's set out in the contract. You have to comply with lobbying rules. You also have to comply with new cybersecurity regulatory requirements for entering the supply chain. The Department of National Defence will be pushing those requirements to all of their suppliers.
You have to worry about your Corporate Security Program and, finally, the Controlled Goods Program. Not every organization needs it, but this is one that can often be overlooked.
While it's not a huge regulatory burden, it's one that organizations frequently overlook because they're focused on what they do. If they create a bolt that's going into a submarine, they want to be very good at making that bolt and often don't think about the other regulatory hurdles they need to address. As a result, these requirements can be easily overlooked.
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What is the first thing you'd tell a business leader who's curious about entering the defense space?
I think a lot of people would like to enter the defense space, but the number one thing to start with is understanding the defense capabilities.
What does the Department of National Defence actually need, and can you supply it? You have to have a theory about what problem you can solve for the defense sector.
The starting point is having a theory and knowing where you could play. That's where it's often beneficial to engage third parties like BDO to help you develop that strategy. Think about where you could play in that space. That's where I would start.
If you cannot supply something that they need, then you won't be in this sector.
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Defense: niche market or broad opportunity?
It's both.
Right now, it's hard to get a ticket into that club. That being said, $70 billion will be entering the Canadian marketplace. It will include our NATO partners as well, so it won't all be Canadian spending, but it's going to create a fairly broad opportunity over the next 10 years.
At the same time, it's niche because you have to fit within the defense capabilities. This is not a situation where everything across the country is being purchased. There is a very specific set of products and capabilities that the government will be buying.
Biggest risk companies overlook?
Their value proposition and how they can become a trusted supplier to the Department of National Defence.
It goes back to starting with a theory about what product you offer and what problem you can solve. However, companies often underestimate the competitive landscape and the fact that they may not be the primary contract holder. They may end up as a Tier 2, Tier 3, or Tier 4 supplier.
Understanding how to enter that procurement environment is probably the biggest risk.
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Early sign a company isn't defense-ready yet?
I think there are two.
One would be whether you are Controlled Goods cleared. That is a critical element of the defense supply chain. If you're not on that list, and the Government of Canada publishes that list, it's an indicator that you might not be ready.
Now, that's not the only indicator. If you haven't developed your specific theory for how to enter the defense sector and tested it with anyone, that means you're probably not ready.
Thank you for listening. I cannot wait to do more together on this topic.
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