Under sequestration, the Pentagon has made a cost-conscious decision to emphasize simulation and classroom training. It’s a logical move, as live-flight hours are being cut and technology has evolved to allow greater fidelity in simulators. It also means companies are scrambling to get into the growing training and simulation market.
Montreal-based CAE is one of the largest training and simulation companies in the world, and the largest defense contractor in Canada.
Q. The Pentagon is looking at increasing simulation to save money on training. From your perspective, what are the short- and long-term impacts of sequestration on simulation?
A. Clearly with new platforms, like the F-35, there’s orders of magnitude more simulation that will be used than there is on the aircraft that you’re replacing. We can see that because we do both. Cuts and delays are happening faster than replacement, so short term is probably neutral to negative, but medium to longer term I think is good.
We’ve cast our net a little bit wider in terms of programs we bid on because there’s less to be had. But when I look at the pipeline of proposals we have out there, it’s the largest it’s ever been. And it’s not because we’ve taken the view that “OK, let’s bid [on the] kind of stuff we wouldn’t bid before,” because bidding on the military contracts is very costly and very time consuming. We only bid if we think we have a pretty good shot at winning. So the fact that a proposal pipeline is growing tells me sequestration is causing more focus on simulation. Cutting squadrons, parking aircraft carriers — we can offset some of that using simulation and maintain the readiness.
Q. Despite sequestration and global budget cuts, are you seeing other people trying to break into the market?
A. I think we are seeing more competition, and I’m not sure it’s as much new entrants as people bidding on programs that maybe they didn’t bid on before. As the opportunities diminish in some areas, people look at where the growth is and simulation is one growth area, so there are more people bidding on the same contracts.
And the government, I guess to its credit, is being very smart here in the US about how to go about procurement. They’re really tightening and making people compliant so they can educate more men.
Q. CAE lost out on the training contract for the KC-46 tanker and there aren’t many new platforms expected over the next decade. How do you tailor your business strategy in this environment?
A. The first thing is don’t bid on all of them, don’t put your money on the same square. I would have loved to win that contract, who wouldn’t? But we knew going into the competition, it being one of the last big ones, everybody and his dog was going to be there, and they were. There were five credible competitors and it was going to be quite aggressive.
For us, it’s about spreading our bid activity, spreading our money towards investment and research and development [R&D], and bidding not only in the US but internationally to be able to sustain a business without having to overly rely on one big contract.
Q. You had the contract to train UAV operators for 10 years before it was restructured in 2008. In August, you won the contract again. What has changed in training UAV operators?
A. I think what’s changed is that there’s a very real need to maintain the training that people have [gained]. The question is how do we maintain that readiness, and the use of simulation-based training is seen as critical. You’re looking at more immersive training because what the sensor operators are doing is always linked to somebody else, someone else is using that data — so providing that whole environment of simulation, not just flying the asset, this is what’s changed, and I think that’s one of the areas where we can bring a lot of expertise.
I think over time we’re going to see a growing use of commercial applications for UAVs as the national airspace is opened up, and I think that we’ll be seeing an opportunity there as well.
Q. When we talk about training simulation, it seems like most of the time it’s on the aviation side of things. What is being done for the Army, Navy and homeland security?
A. I think that there are applications from the same group as aviation and moving more training into vehicle trainers, into naval trainers, or bridge trainers. For us it’s more about trying to grow [new areas like], rehearsing homeland security events, disaster management events and creating these national training centers with the governments of countries. We’re getting a lot of receptiveness outside North America to this with governments that want to exercise, and the only way to really do that effectively and come up with local scenarios that apply [and] that are on situation geography is to use simulation. That’s an area we really want to go into.
Q. What regions will see growth in training and simulation?
A. I think it will become bigger, and I mean, it’s good — great growth rates in places like India, like Asia, like the Middle East right now, all for different reasons — though it’s obviously starting out at smaller rates. So the quantity is less, but there’s no doubt that’s going to increase. We’re fortunate because we’ve already got a good position in a lot of those countries. There’s good opportunities for us specifically in those areas, so I think it will become a higher percentage.
Q. When moving into countries that don’t have a history of top-line simulation, do you sense pushback from the military there?
A. I don’t think of it as pushback. In places like that, sometimes you have to overcome the financial thinking, but in a lot of those countries, we have people on the ground that are locals and we’re out there all the time basically developing the market, developing the opportunities for us. There’s less of a concept of programs and record over there. You have to create opportunity.
I think India is a bit different than some of the other Asian countries in that they’re not coming from a place where they’ve used a lot of high-end, high-performance simulation, so there’s an education and awareness process, but they’re acquiring these kind of advanced Western platforms, and they’re coming up to speed pretty quickly to “OK, what’s the training requirement” that comes with part of that.
Q. The gaming community has made a lot of developments with active environments, which react to what the player is doing. Is that a technology that can be ported to military training?
A. I think it’s key. I think there’s a lot of things. Lower cost is a big one. But clearly making things more realistic will lead to more adoption. It’s fine for the military to say, “We know we have to do more in simulation,” but if the environment that they’re training in is not immersive and realistic like the real world that they’re trying to replicate, then they can’t do more in simulation. Things like the dynamic synthetic environment are an attempt to make that synthetic world more like the real world. In a war game, or in real battle, things happen — bombs are dropped, people die, there’s lots of different assets operating — so you need the synthetic environment in order for the military to use that to do that kind of training.
Q. Is there risk of militaries becoming too reliant on simulation?
A. I think the customers themselves are better experts on that than we are. Our job is to make [simulations] as realistic as we can so they can apply it in the best training tool. I don’t think we would advocate that military training should all be digital — we’d never advocate this as practical or desirable.
Q. CAE spends around 10 percent of its budget on R&D, a relatively high number. Why?
A. At the end of the day we’re a technology company. Obviously you have to be able to generate the profits to be able to sustain that level of investment. But for us, we take a long view. To be able to sustain and grow our business and expertise and seek to do what the services are looking for, [which is] the most realistic and immersive training, there’s no secret — you have to continue [to invest] and there’s many ways of doing that. We invest obviously on new programs, new technologies, but we actually work with our employees a lot. We borrow this from other companies, Google and others — we go to our employees to seek out ideas, and great stuff comes out of that. So it’s the lifeblood of the company.
It’s alluring sometimes. People come to us — “Oh, I’d like to do this” — and you really have to focus or else you could squander your money all over the place and for little return. We try to not waste our time on technologies that are being driven by other sectors. A few years ago, we used to do a complete visual assistance, projectors, screens, the content, everything, and those things used to sell for $3 million apiece, at least. Today, because of the advances in the home entertainment and the games industry, we buy our generators, we buy our projectors, we differentiate content and that’s where we apply our skills.
Q. Are there opportunities for Canada’s military industry to grow?
A. [Prime Minister Stephen Harper’s] government has invested massively over the past few years to modernize, and the Canadian military has done some great things, like brought in the C-17 transport aircraft, given the strategic airlift capability that Canada needed for troop deployment and humanitarian missions. So there has been pretty significant investment to modernize. I think there’s opportunities for not only us but for companies operating in Canada.
Aaron Mehta in Washington.