Our Feb/Mar issue covers industry issues that matter. Plus, we visit Pearson’s deicing facility. More inside!
The aerospace sector may be at a turning point, according to a survey of industry executives.
For the first time in its annual worldwide review of 200 civil aerospace managers, global consultancy Roland Berger found that a majority of executives see an end to the “supercycle” of aircraft manufacturing that has dominated the past decade and are starting to prepare for a downturn.
While production lines will remain buoyant for some time due to large order backlogs, “what we are seeing is the degradation of the mood in the past three to four years, and a real inflection point this year,” said senior partner Manfred Hader.
Operations and delivery, previously the top priorities for aerospace executives, are now sharing time on corporate agendas with what Roland Berger calls “a return of strategies”–subjects like digitalization, new product strategies, mergers and acquisitions, and external growth strategies.
In a presentation to the Canadian Aerospace Summit on Nov. 8 that suggested “turbulent” times ahead, Hader outlined six trends he said are driving that change in executive thinking.
The first is “volatility,” the simple fact that the book-to-build ratio for many companies is now less than one. While major original equipment manufacturers (OEMs) still have enough orders to sustain operations for the next eight to 10 years, all will “need to have the necessary agility [and] flexibility, both in production and supply chain, to cope with an eventual downturn.”
For Canadian suppliers to Bombardier’s C Series, that volatility could manifest itself in one of several ways as the deal with Airbus shakes out. Because of low airplane volume and high program risk, Bombardier has paid more than Airbus for many aircraft components.
“Airbus will look at the combined supply chain of the C Series and their airplanes, and they will basically push all of the suppliers to align some conditions,” Hader told Skies. “OEMs don’t like to deal with too many smaller suppliers, they like to have bigger work packages. [That] could lead to companies here being able to grab some wider business in the Airbus Group, [but] it could also lead to some of the companies disappearing or being eaten up.”
However, with Airbus’ marketing and sales behind the C Series, those suppliers that adapt and survive could see a significant increase in the number of aircraft than had Bombardier gone it alone, he noted.
Hader’s second trend is the emergence of China. Not only does the Chinese government have a clear and ambitious policy to claim a major stake in the global aerospace market, but it’s putting the necessary resources behind it. And as China continues to build its own supply chain, western companies, especially large OEMs like Airbus and Boeing, will have to invest more in that chain or “run the risk of being kicked out.” That investment will likely mean the expansion of Chinese suppliers into the global market.
For Canadian suppliers, “it could mean two things. One, expect to be put in competition with a Chinese peer. Two, it can help if you set up some kind of operation in China or even team up with somebody in China,” Hader told Skies. “And some [Canadian] suppliers will probably receive the interest of Chinese companies. Expect some of them to change ownership. And that’s not necessarily a bad thing. It can be a survival strategy also.”
The third trend is what he called “reconfiguration of the industrial landscape.” As large OEMs demand more costs reduction throughout the supply chain and integrate new business lines into their operations, tier one suppliers have responded over the past 12 months by “gaining scope” through mergers, acquisitions and partnerships. This creates “super tier ones” like United Technologies Corporation that could conceivably control a significant portion of the market share in almost every major category of aircraft components.
“That means you are too large to fail, and that is frightening to the OEMs,” Hader told the summit.
The counter-response by OEMs has been a move into the after-market, traditionally the domain of suppliers, as a way to cope with declining aircraft sales.
“In a way it’s a fight of big elephants,” said Hader. Smaller companies will have to assess whether to gain scope as well or find and maintain a niche that supports a super tier one or OEM. “The question is much more pressing than it has ever been in the past.”
The fourth trend is a reversal on globalization. Hader suggested that outsourcing to so-called low-cost countries has started to reverse as companies find less room for failure in the quality of their components. And with greater use of robotics, a company can bring back manufacturing and still contain costs while better monitoring for quality.
The trend also has geopolitical reasons, he noted. “Many of the countries where [you] might outsource are also [high] on the risk heat map of geopolitical stress.”
Fifth on the list is the progress of digitalization. If the past few years saw the introduction of digital systems to make individual functions leaner and faster, the next frontier will combine functions “to make sure that your overall businesses system benefits and works better.”
“This is a topic where size does matter,” Hader acknowledged to Skies, but he said small companies still grappling with the cost of digitalization don’t have much choice. “It’s like an entry ticket in the end. Either you buy into certain standards that the OEM is setting or…”
Hader’s final trend is electrical propulsion, a sign of the type of disruptive technology that could further shift the landscape. A Roland Berger survey found some 70 companies active in electrical engines and “more than half had nothing to do originally with the industry” or combustion engines, he said. “This is what can happen with companies coming from the outside that are not bogged down with the historical weight of the industry.”
Most aerospace executives are well aware of all six trends, he said, but they are so focused on daily operations that they have little time to contemplate how their company might be affected and how to respond. “I sense a lot of companies are in a dilemma. They don’t have enough time or mental capacity or capability to look at the question from a holistic point of view. And they don’t have the experience to negotiate or address these kinds of dramatic changes.”
A panel of industry executives told the summit that agility is the key to being able to deal with so much uncertainty and to prepare employees for what Lee Obst, managing director for Rockwell Collins Canada, called a “technology revolution.”