Arming for advantage: How Canada’s defence agenda can spark a manufacturing renaissance

Key contacts:

Jeff Hamilton, EY Canada Senior Advisor for Defence and Security
Steven Maynard, EY Canada Managing Partner, Government and Public Sector
Brian Campbell, EY Canada Partner, Consulting Services
Jamie O'Hare, EY Canada Government & Public Sector Cyber Leader
Marc Brazeau, EY-Parthenon Canada Partner, Infrastructure Advisory

How is the world’s defence agenda creating opportunities for Canadian manufacturers?

Canada’s next era of nation-building will hinge in many ways on the country’s defence agenda. Manufacturers willing to innovate boldly, creatively and proactively around this national priority can imagine an entirely new future. Combined with the release of Canada’s first-ever Defence Industrial Strategy, this is the year to do it.

That’s part of NATO’s collective push to ramp up military budgets along the same targets and timelines.²

This says a lot about Canada’s evolving defence policies and global security. It’s also a chance to reimagine advanced manufacturing on a national scale. Why? It will take a rich ecosystem of advanced manufacturers working together with telcos — as well as private and public stakeholders — to fulfill defence and security needs in Canada and around the world. 

Nationally, we have the political appetite, committed investment and new incentives to get going: think hundreds of millions to anchor Canadian quantum companies and talent at home over the next five years.³

As Ontario Premier Doug Ford reiterated early in the new year: “We have the best auto workers in the entire world.”⁴ It’s time to consider how we can align that talent and those capabilities with the opportunities on our doorstep. What does that look like?

Geopolitics are evolving daily. Just one year ago, nearly three in four CEOs expected geopolitics or trade tensions to impact company performance over the next 12 months. Fast forward to 2026, and

say they’ve already altered strategic investment plans as a result of trade policy developments and geopolitical shifts.

From a defence perspective, many countries have underinvested in defence budgets for years, perceiving war as a relatively low threat. Right here in Canada:

Just 59% of Canada’s naval fleet is operationally ready, and only 51% of key land fleets are serviceable for Canadian Army operational requirements.⁶ When assessed holistically, only 61% of the combined military fleets are ready for operations against a target of 90%, which National Defence projects will take until 2032 to achieve.⁷

Essentially, decades of chronic underfunding, as addressed in the new Defence Industrial Strategy, have left existing assets in a worrying state: problems that were pushed off until they became crises.

Meanwhile, since 2022, NATO countries responded to the war in Ukraine with financial aid, security assistance and equipment. Along the way, these countries crossed a crucial tipping point: many became incapable of providing sustained material to Ukraine while also maintaining a credible national response to security concerns. 

Even as Canada and our NATO allies ramp up their focus on defence, threats are growing, battlefields transforming. Significant shifts in US policy have put geopolitics on centre stage. In fact, a new report from the Eurasia Group pegs the ongoing political revolution in the US as the top risk for 2026.⁸  

From action in Venezuela to the ongoing war between Russia and Ukraine; Arctic sovereignty revolving around geopolitical tension tied to Greenland; continued tension and new conflict across the Middle East, and between China and Taiwan: the world is rife with discord. The Canadian government itself acknowledges the country faces its most significant risk of major international conflict “since the end of the Cold War.”⁹  

This is unfolding as the broader macroeconomic environment takes dramatic turns. The defining technologies of the 21st century economy run on an electric stack of batteries, motors, power electronics and embedded computing. The minerals behind that stack, and the pursuit to find them, are winding their way into geopolitical angst. So much so, the Eurasia Group pegged this dynamic as the second greatest risk the world faces today. 

These forces are fundamentally reshaping globalization in terms of both economic sovereignty and foreign policy. We are entering an era of asymmetric globalization, in which different aspects of the global economy simultaneously move towards neo-globalism, regionalization, Cold War II and self-reliance. 

As these drivers converge, Canada’s manufacturers must ask: are we prepared to lead within this ecosystem and turn disruption into new progress? 

Manufacturers that shift mindsets and double down on defence can create a competitive advantage

Early signs show that if Canadian manufacturers don’t consider these opportunities now, others certainly will.

in new defence spending, Ottawa and Montréal played host to Swedish royalty looking to strengthen military alliances. Discussions are also underway with the world’s leading producers of telecommunications equipment, fighter jets and surveillance aircraft. Industry giants lead the headlines, scoping Canada as a potential spot to put down roots, build up defence supply chains and diversify growth. 

Perhaps the most significant procurement in Canadian history, the Canadian Patrol Submarine Program will soon be awarded to an original equipment manufacturer (OEM) from either Germany or South Korea.

These foreign OEMs see limitless potential at home and around the world. We should, too.

Across Canada, our history is punctuated by manufacturers who have not just built, but invented the equipment, machinery and infrastructure that’s given way to net-new product channels and categories. 

Leading shipbuilders have grown here over the last two centuries. The businesses behind recreational and support vehicles ideal for securing the North are made in Canada. The Canadian Armed Forces’ next multifrequency, Arctic military satellite communications system will be co-developed right here by two tech juggernauts redefining what is possible in aerospace and outer space.¹¹  At least two Canadian companies are dominating the armoured combat vehicle demand domestically and for many foreign government clients. 

Canadian manufacturing needs more of that mindset. 

In addition, as Canadian nation-building efforts increasingly push for foreign OEMs to include at least some domestic manufacturing or hiring, partnership and alliance opportunities are also emerging. For example, one of two shortlisted submarine builders partnered with Canadian AI company Cohere to bring its technology aboard Canada’s next fleet of submarines should the company win the bid.¹²  

Canadian Industry groups like Cove, Communitech and Invest Ottawa — all with proven track records helping innovators scale up — have assertively established themselves within emerging, high-profile programs like Defence Innovation Secure Hubs (DISH), in conjunction with the federal government’s Bureau of Research, Engineering and Advanced Leadership in Innovation and Science (BROEALIS).¹³  Relationships have also been forged with the NATO DIANA Centre of Excellence in Halifax.¹⁴ 

Specifically in Canada, the Defence Investment Plan must be accelerated to enable the more substantial new spend which will need access to more capacity than is currently available. In some cases, existing program and projects in-flight are based on schedules that reflected challenges in managing costs and phasing delivery with out-years to blend the funding profile as opposed to when National Defence actually needs delivery.

There is also an opportunity, further amplified in the Defence Industrial Strategy, for both government and industry to reevaluate current programs established to deliver over decades — for example, Future Fighter and River Class Destroyers — to assess whether accelerated delivery could prove advantageous to managing the emerging and increasing demand signal from government to industry. 

In addition, manufacturers likely have many opportunities to engage in M&A as a means of building or enhancing capability offerings and capacity, especially in highly skilled labour sectors such as marine and aerospace. Case in point: there are a number of small to medium-sized shipyards optimally located that, if merged with a large National Shipbuilding Strategy yard, could become a significant game changer in national capacity. The same can be said for the aerospace sector, where the forging of strategic partnerships is becoming a more common theme. 

Put simply: in addition to thinking bolder about defence opportunities, manufacturers will also want to consider new ways to team with foreign entities and homegrown incubators alike. 

What will it take to evolve Canadian manufacturing and shape defence for generations to come?

Canada needs greater resilience and better security. But there’s a perception that an impossible amount of work must be done for manufacturers to effectively support the defence agenda. 

Specifically, Canada’s growing demand for defence manufacturing is exposing longstanding structural weaknesses across the supply chain. That includes limited domestic production capacity, especially for high demand items like artillery ammunition, which prevents rapid scaling during global conflicts. This challenge is compounded by deep reliance on foreign suppliers for critical minerals and specialized components, leaving Canada vulnerable to geopolitical shocks, trade disputes and coercive economic tactics. 

At the same time, persistent shortages of skilled labour across manufacturing and logistics reduce efficiency and constrain the country’s ability to expand output when required. Inefficient, slow and understaffed procurement processes further delay modernization efforts, often resulting in capital funds going unspent even when strategic needs are clear. Sustained, predictable, reliable funding will be critical to our nation’s success.

These issues are intensified by poor visibility across multi tier supply chains and broader transportation bottlenecks. Defence organizations often lack insight beyond their first tier suppliers, making it difficult to identify deeper vulnerabilities related to component sourcing, cybersecurity risks or fragility among smaller subcontractors. Meanwhile, congestion at ports, aging infrastructure and frequent labour disruptions in rail and marine transport weaken the movement of defence goods across the country. 

These challenges highlight a fundamental tension: Canada must balance the lean efficiency expected during peacetime with the agility required for rapid, war-footing mobilization. Strengthening the defence supply chain will require not only investment, but a deliberate shift towards resilience, flexibility and sovereign capability with commensurate sustainment capacity. 

What will it take for defence overall, and manufacturing specifically, to overcome these hurdles?

• People empowered by digital transformation. This should include a focus on AI, cybersecurity and more, as well as a robust industrial base grounded in innovation and improved procurement and, infrastructure, especially in the North. Strong alliances involving joint operations and cooperative development will also be important. 
• Engagement with Indigenous communities that brings them into meaningful dialogue. This workforce represents a wealth of untapped potential, as long as technology education, security clearance and the supports necessary for communities to grow, store and manage resources can ensure that defence investments also create new opportunities for Indigenous people to thrive. 

Numbers show Canada’s defence industry was: