Aerospace & Defense Top Management Issues Radar 2017 · il aerospace and defense sectors. However, this year, we see that "Strategy" is back on industry executives' minds, since the

The preparedness paradox and the comeback of strategy

Aerospace & Defense Top Management Issues Radar 2017

2017

September

navigating complexity

2 Think:ActLorem ipsum

T H E B I G

3+100%

of the executives in our survey say the civil market is declining compared to last year.

Page 8

70%of our respondents expect digitization to bring

new business models and new products and services. Page 7

63%feel highly prepared for events they cannot

influence, while 56% feel less prepared to change important things they can.

Page 14

DETAILS ON THE "PREPAREDNESS PARADOX" P. 15

Think:ActA&D Radar 2017

3

Since the last edition of the Roland Berger Aerospace and Defense Top Management Issues Radar in 2016, the geopolitical landscape has changed dramatically – more than most would have imagined was possible.

Whilst political unrest and conflict has continued in hotspots around the world, particularly in the Middle East, the world has experienced a sustained threat of terror attacks, coupled with further uncertainty from the Trump administration, the Brexit negotiations, China's emergence as a global counterweight to the US, and the antics of North Korea.

Interestingly, this year's survey on the developments in the A&D industry showed that almost two thirds of A&D executives surveyed were remarkably calm about the shifting geopolitical landscape, reporting that they were well-prepared for geopolitical changes. This con-trasts starkly with other recent cross-industry surveys, which show boards and financial professionals are in-creasingly concerned about geopolitical risk.

Conversely, senior A&D executives say they feel unpre-pared in areas of change within the A&D industry such as technology and innovation, to which they are osten-sibly more able to respond than they are to the major geopolitical developments that none of us can control. This attitude is surprising, which is why we are calling it the "preparedness paradox". The reverse conclusion to this paradox is an urgent need for more and better business strategies throughout the A&D industry to close this gap in preparedness.

This need is reflected in the return to a top priority in the A&D industry: strategy is back! We believe its re-emergence means the time is right to reassess your company’s strategic and competitive position in the market – whether that be the first planning phases of new civil programs, or a re-modelling of the export model in the defense sector – and consider the impact of disruptions, including digital opportunities, that can bring top-line growth.

For the A&D industry, geopolitical uncertain- ties are here to stay. Paradoxically, managers feel prepared for the unknown.

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SURVEY SCOPE

This A&D Management Issues Radar is the 9th edition of our annual survey since we first launched it in 2008. Our goal is to support executive-level thinking across the aerospace & defense industry. This year, we interviewed roughly 220 senior industry executives from almost 100 companies in 15 countries. Our survey captured prevailing trends on the following top-management issues:

MARKET DYNAMICSHow long will the current buoyant market conditions in the civil aerospace sector will continue?

DIGITIZATIONWhat will be the main impact of digitization in the aerospace & defense industry?

PREPAREDNESSWhat are the most pressing trends for the industry? How prepared are you to face them?

The survey was conducted with participants from OEMs as well as tier-1 and tier-2 suppliers. Leaders in various adjacent sectors also participated; for exam-ple, manufacturing equipment suppliers, consul-tants, automation specialists, technical service pro-viders, logistics providers and industry associations.

We included a wide range of industry players such as Airbus, BAE Systems, Boeing, Bombardier, Finmec-canica, Lockheed Martin, Rolls-Royce, Safran, Thales and many others.

61% of respondents work for companies with more than 1,000 employees. The executives surveyed do business in Western Europe (95%), North America (57%) and Asia, including China and India (56%). A large proportion work for companies active in the civil aircraft segment (79%) and the military aircraft (68%) segment.

METHODOLOGY


5

For the past four years, including 2017, "Manufactur-ing" was the top priority of respondents across the civ-il aerospace and defense sectors. However, this year, we see that "Strategy" is back on industry executives' minds, since the three priorities that follow "Manufac-turing" are all topics related to strategy: "Product Strat-egy" (which has been on the rise in the past few years), "Digital Transformation" and "External Growth, M&A, and Post-Merger Integration". →A

For both the civil and defense sectors, our experi-ence indicates that the OEMs define the strategies and consequently influence industry structures and dy-namics. This can put lower-tier suppliers in a defensive position at a time when technology is a disrupter in the market with unforeseen implications. Whether the dis-ruption comes from digital technology or new manu-facturing, tech niques, like additive manufacturing, that could potentially squeeze suppliers out of the mar-ket suppliers must consider how to move away from a defensive position.

Manufacturing. For the third year running, the A&D sector remains strongly focused on manufacturing and delivery – especially in the field of civil aircraft. "Manu-

facturing" was mentioned by 50% of respondents in civil aerospace as one of their three most important topics. For example, at Airbus, the focus remains on the ongoing ramp-up of the A350 program and the par-allel challenge of switching to the A320neo family. Both projects keep "Manufacturing" a core focus area.

Digitization. "Digital Transformation" ranks the sec-ond highest priority among A&D leaders this year, after it was introduced to our survey in its own right for the first time. The strongest focus on digitization is among OEMs, a group that anticipates cost savings and new business models from the technology. We also saw a shift in attitudes about the value of digitization and its potential to bring in top-line growth. Roughly 70% of respondents in 2017 said they expect digital transfor-mation to result in new business models, products and services, up from only 49% in 2016.

Overall, the number of respondents who expect both a top- and bottom-line impact from digitization almost doubled to 61% compared to only 31% in 2016. At that time, more than half of the respondents saw performance improvements (a bottom-line effect) as the only possible result of digital transformation. →B

Executive mindspace in 2017 is still devoted to manufacturing – and now to all facets of strategy, too


6

Source: Roland Berger, 2017 Top Management Issues Radar

A

DIGITIZATION QUICKLY ESTABLISHED ITSELF AS A TOP CONCERNFor top executives at OEMs and defense players, digital transformation ranks first

OEM

Digital Transformation

Manufacturing

Product Strategy

New Market /New

Segment Entry

TIER 1

Manufacturing

Supply Chain

Product Strategy


TIER 2

Manufacturing

Product Strategy

External Growth /

M&A and PMI

Supply Chain

TOTAL

Manufacturing

Digital Trans

formation

Product Strategy

External Growth /

M&A and PMI

OTHER

Manufacturing

External Growth /

M&A and PMI

Geographic Expansion


#1

#3

#2

#4


7

New business models, new products and/or services (top-line growth)

Both

9%

61%

30%

2016 2017

BEXECUTIVES EXPECT BOTTOM-LINE EFFICIENCIES TO BE THE MAJOR OUTCOME OF DIGITIZATION, BUT THAT OPENNESS TO TOP-LINE GROWTH WILL RISE


Impact of industry trends on the A&D sector [% of answers]

Better performance in terms of cost, speed and quality (bottom-line efficiency)

18%

31%

51%

Supply Chain. When we first noticed that "Supply Chain" had slipped out of the list of overall priorities, we did a double take. It was quite surprising to see it come in as a lower priority among all respondents, even though OEMs still spend significant time manag-ing suppliers and working through complications. This may indicate that current supply chain issues are being seen as part of manufacturing and delivery.

Among tier-1 suppliers, "Supply Chain" still ranks high – in second place, with 35% of respondents plac-ing it among their top three priorities going forward. This may be linked to tier-1 suppliers taking on more responsibility for managing sub-tier suppliers in re-cent years, as OEMs passed this activity down a level.

M&A. Our data also showed that M&A activity is gaining importance again, especially on the supplier level.

Some 36% of respondents from tier-2 and lower levels in the industry said "External growth, M&A and PMI" were higher priorities than others. And 27% of respon-dents across the board listed M&A as one of their top four priorities. This data is a reflection of structural moves that currently are challenging the traditional value chain. We are observing both a growing trend to-wards verticalization (e.g. Rolls-Royce recently invested in the Spanish turbine maker ITP) as well as the en-trance of new players (e.g. Ligeance Investments, a sub-sidiary of Shaanxi Ligeance Mineral Resources (SLMR), bought Gardner Aerospace).

With "External Growth, M&A and PMI" back as top pri-orities, we expect to see more of those in the future.


8

to continue for at least five years. Through 2020, OEMs in the civil sector are expected to ramp up production as a result of the huge order books they have built up in recent years. The single-aisle programs have order books that equate to eight years of production, while order books for the popular new generation of wide-bodied aircraft will keep OEMs busy for five to six years.

This sentiment is also reflected in the new program launches and discussions on rate increases. Boeing, for instance, is considering an increase of the 787 produc-tion rate from 12 to 14 aircraft per month. In the re-gional jet segment, the MRJ will be introduced, and the ERJ 175/190X versions will replace older E-Jet variants. Meanwhile, all major business jet OEMs, including Cessna, Bombardier, Gulfstream, Dassault and Em-braer, will launch new types of aircraft and the Honda-Jet will finally come to market.

At the supplier level, only 8% of tier-1 senior execu-tives stated that the downturn has already started. One explanation could be that tier-1 suppliers are increas-ingly serving as integrators of large work packages for OEMs, acting in close collaboration with the OEMs at all times. This makes them more inclined to give the

BRACING FOR A DOWNTURN In 2017, a rising number of respondents in our survey said we were nearing the top of the cycle for civil avia-tion, and 20% said the market has already entered the downward part of the cycle.

As predicted in last year's survey, respondents in civ-il aviation are becoming significantly more pessimistic about future market conditions. Two years ago, 37% of respondents still believed that we were entering a "su-percycle" in which orders would be well-managed by OEMs; today that proportion is down to only 21%. →C

Now, nearly 60% of respondents believe we have al-ready entered a downturn, or we are near the top of the current cycle, up almost 100% compared to those who held these views last year.

One factor that may be influencing the sentiment in civil aviation is the currently low price of oil, which is set to remain low in the future due to structural rea-sons. Airbus and Boeing are rolling out new programs of fuel-efficient planes, but low oil prices mean airlines are not rushing to replace their fleets to curb their op-erational costs.

Despite the pessimism, some 40% of interviewees still expect the current cycle of growth in civil aviation

Civil aerospace: Signifi- cantly more pes simistic in 2017 – nearly 40% see a down turn within 3–5 years


9

Expectations of market conditions in the civil A&D sector [% of answers]

1) Response was not an option in our 2015 and 2016 studiesSource: Roland Berger, 2017 Top Management Issues Radar

27%

36%

37%

2015

Gradual rate increases will be well-managed by the OEMs in response to future changes in demand as the industry continues on a long-term supercycle

The present cycle still has some way to go (10–20% or more increase in volume terms), after which there will be a downturn in >5 years’ time

We are near the top of the cycle (within 10% in volume terms) and a downturn will come in the next 3–5 years

We have already entered the downward part of the cycle1)

31%

36%

33%

2016

39%

20%

21%

2017

20%

CIN CONTRAST TO PAST YEARS, RESPONDENTS WERE PESSIMISTIC ABOUT PROSPECTS IN CIVIL AVIATION.

Irkut, who could potentially threaten the Airbus- Boeing duopoly, are gaining ground. But, in particu-lar, digital technologies are causing the aerospace sector to fundamentally rethink business models and practices.

OEMs the benefit of the doubt and put their faith in the production forecasts issued by the OEMs.

Additionally, external market changes and internal company developments continue to redefine civil avi-ation. Competitors like China’s Comac and Russia’s


10

BENEFITING FROM GLOBAL TURMOILOverall, global military spending has increased for two straight years since 2014 and, at USD 1.69 trillion glob-ally (according to SIPRI), is almost back to its 2011 figures. Much of that growth comes from increased spending in Asia, Oceania and Europe, after a period of decreased spending. Lower spending in the Middle East can be explained by low estimates for spending by Saudi Arabia in 2016.

The vast majority of industry leaders in our survey (92%) expect the global budgets for defense equipment to grow further in the coming years. →D This trend was indicated in 2016, and it has continued this year with a heightened sense of geopolitical uncertainty and pres-sure from the US administration for Europe to foot more of its own defense bill.

Last year, almost 90% of our interviewees said de-fense equipment budgets for Europe would be flat or growing slightly. This year, about the same number of respondents, placed their bets that budgets will fur-ther expand. More than a third expect the compound annual growth rate (CAGR) to be 2% to 5% in the next one to two years. Indeed, a single tweet from the US president can send countries and markets scrambling and leave diplomats and business leaders in awkward positions.

Trump’s communications aside, our study showed that overall, executives see a variety of reasons for the expected increase of spending on defense equipment in Europe, including East-West tensions (57% of re-spondents said this was a contributing factor). Another

driver is that security spending is often part of defense spending. →E

Almost 60% of respondents said the definition of "defense" has been broadened to include "security", and spending on security is growing rapidly. This in-cludes everything from using the military domestically to fighting off cyberattacks. In our study, almost half of the participants said increased nationalism and de-creased reliance on alliances will lead to more spend-ing by individual states.

Whatever the reasons are for the clear swing to ex-pectations of spending growth, the opinions expressed in our survey indicate high levels of uncertainty in the market due to East-West tensions, increased national-ism and the other reasons discussed. Our data shows that there is not one reason solely responsible for this attitude. This indicates a robust structural need for in-creased investment in defense equipment in the com-ing years.

However, we believe defense OEMs need to rethink their business models in countries that are keen to de-velop local capabilities. This includes India, Saudi Ara-bia and Turkey (see sidebar on page 13). Repositioning on the value chain to become a "shadow OEM" that supports local OEMs could be a better option than holding on to an export model in decline.

Defense: Growing need for security leads to greater optimism


11

"North Korea is looking for trouble. If China decides to help, that would be great. If not, we will

solve the problem without them! U.S.A."Donald J. Trump on Twitter, April 11, 2017

No

Yes

Yes

56% Yes, I expect defense spending to grow slightly in the coming five years (1–2% CAGR)

36% Yes, I expect defense

spending to grow strongly in the coming

five years (2–5% CAGR)

8% No, I expect additional cuts to defense spending in the coming five years


THE VAST MAJORITY OF INDUSTRY LEADERS EXPECT DEFENSE SPENDING TO GROWEnd of decline in government spending on defense equipment in Europe [% of answers]

D


12


Increase in nationalism of individual states

Decreasing reliance on alliances, leading individual states to spend more

The definition of "defense" has been broadened to include "security", and spending on security is growing rapidly

59%

57%

49%

47%

Resurgence of tensions between East and West

WHY INDUSTRY LEADERS EXPECT DEFENSE SPENDING TO RISE

E

Multiple answers possible


13

AN END TO THE EXPORT MODEL? WHAT THE US DEAL AND THE INDIA STRATEGIC PARTNER PROGRAMS TELL US

In 2017, the US and Saudi Arabia signed an arms deal under which the US would help the kingdom build its own defense industry, through cooperation agreements with Lockheed Martin, Raytheon and General Dynamics. The Lockheed Martin agreement involves final assembly of 150 S-70 Black Hawk utility helicopters in Saudi Arabia, and a newly formed Raytheon Arabia would focus on programs to create Saudi capabilities in aerospace, defense and security reports said.

Similarly, for India – the other major global market – the government has implemented a strategic partner policy designed to foster lo-cal OEMs. The current policy covers four prod-uct categories – armored vehicles and tanks, single-engine aircraft, helicopters and subma-rines. For these products, OEMs will need to evolve (or devolve) from their current roles to become system-of-systems integrators, or at best tier-1 suppliers. The number of product categories is expected to expand further with follow-on policies.

The US deal with Saudi Arabia and policy changes in India call into question the conven-tional export business model – a standard fix-ture of the defense sector for decades. Could

the export model be dead or dying? Will changes bring market consolidation and more global competition, including that from com-panies that have recently shifted their busi-ness models?

Other important questions: will the moves result in companies that are shadow-managed or supported by global OEMs? Will the revenue mix shift between sales and technology licens-ing? And how will production capacities be al-located and global assembly lines managed?

Given these questions, now is the time for OEMs with a strong focus on exports to con-sider their strategic direction, particularly for matters of manufacturing, technology licens-ing and offsets.


14

er-tier suppliers focus on fulfilling the orders placed by OEMs and tier-1 suppliers.

However, we are seeing significant change in the perspective the A&D industry is taking towards dig-ital transformation. In 2017, A&D companies began to look to the digital transformation for top-line growth, not just bottom-line optimizations. Up from 49% in 2016, some 70% of industry leaders now be-lieve digital initiatives will lead to new business models, as well as new products and services. Like-wise, 69% of respondents said they are already set-ting up programs to speed up the process of digiti-zation. →G

A central goal in the A&D industry is to shorten de-velopment cycles and reduce production and mainte-nance costs. Digital technologies are expected to en-able gradual improvements throughout the de vel op ment lifecycle. With this in mind, respondents listed the technologies they see as most likely to cause heavy disruption along the value chain. →H

It is interesting to note respondents’ opinions about which technologies will have the biggest impact on which business areas. About 75% of all respondents said virtual prototyping and testing will strongly im-pact development activities, regardless of their tier. This contrasts with production, where companies will use different instruments or tools, such as predictive quality analytics or self-learning robots, depending on their production needs. Companies thus need a specif-ic strategy for using new technologies in production, whereas there is a clear case for how to speed up and improve development work.

In this year’s report, we drilled down on megatrends with a broad impact on the A&D industry, including so-cial megatrends, technology and geopolitics, to name a few. →F Within these areas, we observed what we call the "preparedness paradox." While companies felt con-fident to tackle matters over which they have little in-fluence, such as geopolitical risk, they felt less pre-pared for areas they can impact, such as industrial trends and the need to innovate.

This links back to the return of strategy as a top management priority and highlights its importance: we believe a good way to minimize the economic risk that companies cannot control is to make their indus-trial base more agile and increase their innovation power. When companies make strides in this way, they are better able to respond to unexpected events in world affairs that can change their economic scenario from one day to the next.

Analyzing the responses of our survey participants, we observe three strategic directions that are being adopt ed: 1. Improving the industrial base via digital transformation; 2. Building the foundation for future success by investing in R&D and technology; and 3. Set-ting the talent agenda right.

STRATEGY 1: IMPROVING THE INDUSTRIAL BASE VIA DIGITAL TRANSFORMATION Digitization has different priorities among different supply chain members. While it is a top concern for OEMs, it ranks only number four for tier 1, and even less for tier 2 (e.g. number seven). This reflects the "wait and see attitude" we have observed in which low-

The preparedness paradox and the come-back of strategy


15


F

THE PREPAREDNESS PARADOX: OUR RESPONDENTS FELT CONFIDENT REGARDING SITUATIONS OVER WHICH THEY HAVE LITTLE CONTROL

GeopoliticsRecent developments on the international scene with an impact on a global scale

SocietyChanges in social behavior over time

GovernmentThe role of govern-ments in defining new rules, regulations, policies, as well as changes in public demand patterns

TechnologyDevelopment with regards to industrial production/manu-facturing along the entire value chain

InnovationInfluence of R&D spending and general new product development on the industry and its players

3.6 3.6

3.2

2.82.9

2.5

3.5

2.9

2.3

2.7

Importance Preparedness

But they felt less prepared for matters where they can have an impact


16

Roland Berger, 2017 Top Management Issues Radar

3%An increasing number of competitors are more flexible than we are, which is a real threat to our business model

We are integrating the digital way of working into our company by acquiring innovative companies and leveraging their ideas and flexibility

MOST COMPANIES ARE STARTING TO SPEED UP THE DIGITAL MIGRATION PROCESS

G

7%21%

69%

We set up programs to speed up the process of digitization in our company and to foster the digital mindset

We are driving innovation by creating our own startup-like companies

Impact of digital transformation on the A&D sector [% of answers]


17


DEVELOPMENT ACTIVITIES

PRODUCTION

AFTERMARKET AND OPERATIONS

76% Virtual prototyping

and testing

55% Enhanced collaborative

environments

49% Simulative design/

CAD+

18% Simulation of first flight/

certification

15% Realistic human

ergonomic analysis

56% Predictive quality/

Enhanced Throughput

68% Predictive

maintenance

44% Self-learning

robots

44% Modularized production

32% Flexibility/mass customization

30% Self-reconfiguring

machines

63% Advanced analytics

51% Shared

data services

49% Remote monitoring

43% On-demand spare parts production

1

3

2

4

5

H

DIGITAL TRANSFORMATION WILL LEAD TO HEAVY DISRUPTION ALONG THE VALUE CHAINA large majority of respondents said virtual prototyping and testing will strongly impact development activities, while companies will use different instruments or tools in production and aftermarket/operations.


18

Cybersecurity is an issue, but the development of increasing connectivity cannot be stopped

76%

We are already able to deal with cybersecurity threats, strong growth of connectivity can be expected

14%

Products will be less connected until security can be guaranteed

1%

Connectivity of products will remain similar to today 0%

Additionally, we are beginning to see the impact of vir-tual reality in industrialization, for instance for engine manufacturing. Safran Nacelles has created a life-sized virtual workspace for realistic visualization and inter-action along the final assembly line for the A330neo nacelle's transcowl component. The company said the use of virtual reality enabled it to reduce the nacelle's development cycle from a typical 60 months to a streamlined 42 months.

Suppliers can’t do without it: Predictive maintenance and advanced analyticsIn aftermarket and operations, predictive maintenance and advanced analytics are technologies of critical business interest, according to our survey. It shows in industry examples: the fleet monitoring team at GE is using a new platform that combines roughly 100 mil-lion records a year from different engines so the com-pany can better identify patterns and trends, and do

that much faster. Looking ahead to widespread use of these technologies to detect degradation and indicate possible component failure, we believe suppliers will be squeezed out of the market if they do not offer pre-dictive maintenance tools. In addition, conflicts with data standards and transmission protocols may arise, since companies at all tiers are developing their own systems.

We anticipate digitization has the ability to change the entire industrial ecosystem in the A&D industry, not just shorten development cycles. The savings potential and efficiency gains in production, as well as aftermarket and operations, are also huge. To move faster toward digitization and get the most benefit from it, companies should determine the de-sired outcome of digitization and incorporate that into their overall strategic plan, while considering which steps of the value chain it may make redun-dant.


CONNECTIVITY WILL INCREASECybersecurity will remain an issue, but not an obstacle

I


19

High (+6% CAGR)

Substantial (+4% CAGR)

Slight (+2% CAGR)

No impact (0% CAGR)

Decreasing (-2% CAGR)

Product development

10.9

37.6

31.5

14.5

5.5

Process innovation

1.2

48.8

12.8

28.0

9.1

Business model innovation

38.4

23.8

28.0

9.8


Impact of current innovations on the A&D sector [% of answers]

J

ON AVERAGE, SPENDING ON PRODUCT DEVELOPMENT AS WELL AS INNOVATION IS EXPECTED TO INCREASE


20

Nothing, not even the concern over cyber security, seems to stop increasing connectivityIn the move towards digitization, cybersecurity is an key issue. Its importance and impact are growing fast, and it will never be fully resolved. Our survey results clearly indicated that although cybersecurity is a seri-ous issue, it will not stop the increasing connectivity of devices. →I Still, we see it as a prerequiste for digitiza-tion across the value chain and encourage companies to proactively develop cybersecurity strategies and stay on top of the threats.

Opportunities for digitally driven business modelsDigitally driven business models come down to what is sometimes called "uberization". This is the question of where there is more value: can assets be shared better, as in the case of ride-sharing company Uber, or can data be used in a more advantageous way? It appears the A&D industry is still testing the waters here, but there are ample opportunities. A good example is the business aviation sector: today, booking processes re-main essentially manual, with no transparent data available on capacity and demand. Eventually, we will see business aviation becoming part of an integrated mobility platform on which passengers book travel

from Point A to Point B and are not concerned with the transportation that gets them there. (See the Roland Berger report: "A new era of personal aviation.") This shift will fundamentally impact both manufacturers and operators of business jets.

STRATEGY 2: BUILDING THE FOUNDATION FOR FUTURE SUCCESS BY INVESTING IN R&D AND TECHNOLOGY Many efforts are under way to refocus the way the in-dustry looks at innovation and where it can find be-yond its products. This means that companies still fo-cused on product innovation might want to begin to diversify their activities.

Though leaders remain focused on operational and production targets, as evidenced by the selection of manufacturing as the top business priority for the third year in a row, we also observe an important shift in their innovation priorities. On average, they expect spending to rise for product development, process in-novation and business model innovation, yet R&D spending is seen increasing much faster for process and business model innovation than for product inno-vation. →J

Additive manufacturing as a game changerOur data showed that OEMs are focused on increased investments in business model innovation (almost half expect an increase of 4% or more). Tier-1 and tier-2 suppliers are mostly focused on process innovation. As mentioned before, OEMs tend to drive strategy in the industry, and have significantly increased the use of additive manufacturing. This technology is increasing-ly relevant for OEMs due to weight reductions of parts through bionic design and part consolidation. For ex-ample, Airbus aims to produce 30 metric tons using additive manufacturing by 2018, which will require 100 machines. GE Aviation is also making strides: its LEAP jet engine features the company’s first engine compo-nent made with additive manufacturing – complex fuel nozzle interiors. The company said it plans to ramp up its production to more than 40,000 fuel nozzles by 2020. We expect the technology to be a true game changer, once parts are designed from the start for ad-ditive manufacturing in future aircraft programs. Due to its implications for the entire supply chain, we also expect it to cause strong disruptions across the value chain. Among others, it provides the ability to produce

Quote on Brexit – The UK perspective

A&D leaders in the UK have become much clearer in their position; last year, they were hardly willing to predict the impact of Brexit at all. It appears that UK A&D leaders are currently more concerned with disruption to their European sales and operations than with any newfound freedom to approach oth-er regions of the world on more favorable terms.

Our study showed that only 13% of European players regard Brexit as a direct threat to their busi-nesses. Those who do see the UK gaining better terms for trading with the rest of the world once outside of the European Union. But most respon-dents are taking a "wait and see" approach about the impact of a "hard" Brexit – some 45% of UK and non-UK interviewees said they cannot assess it, or think that it is too soon to say.


21


OEM Tier 1 Tier 2 Other

As neutral: the impact on our industry will be minor, because the industry is a preferred employer of highly skilled people

19%18%

43%38%

25%

As a threat: it will be difficult to keep the business running with the decreasing availability of skilled workers

48%39%

14%41%

40%

Too soon to say: it is hard to predict which will be stronger – the effect of decreasing talent pools or the impact of integrated automation and robotization on the need of skilled workers

25%24%

19%16%

21%

As an opportunity: it will give us a competitive advantage, because we have a good people development structure

8%20%

24%5%

13%

K

HOW DO YOU VIEW THE LACK OF KNOW-HOW AND SKILLED WORKERS?


22

spare parts on an ad hoc basis in remote locations. Over the medium and long term, this could squeeze out certain players, such as those in tier 2.

Additive manufacturing may not mean an immi-nent revolution, but it definitely has implications for all companies along the supply chain. They need to de-cide which components to build through additive man-ufacturing (e.g. which ones are the most attractive and accessible) and which additive manufacturing technol-ogies are the most relevant (see Roland Berger’s report on Additive Manufacturing in Aerospace and Defense).

STRATEGY 3: SETTING THE TALENT AGENDA RIGHTOur data reveals that some 40% of the respondents be-lieve their business is threatened due to loss of know-how and decreased availability of skilled workers. OEM respondents feel more threatened (48%), which is a reflection of the difficulties associated with transform-ing from task-oriented companies into people-orient-ed organizations. →K

At the same time, more than three quarters of all the respondents believe that the current trend among mil-lennials towards self-realization and independence, rather than valuing a reliable, well-paid job, will have an impact on their business. That said, only 25% of the companies surveyed are already developing new em-ployment models to address this trend. Almost 30% say that they are having difficulties coping with it in their current business setup.

In our opinion, all companies must start now to en-sure they are attractive employers and work in a digital-ly savvy way – something that is critical to the next gen-eration. Understanding and dealing with the needs of their future workers and leaders means embracing ag-ile and digital ways of working, and tapping the digital abilities of their employees as a source of innovation. In the US, three of the five most attractive employers for engineers are companies with digital DNA: Google, Tesla and Space X.

In multiple cases, our survey questions revealed a wide variety of answers. It is obvious now how com-plex the market is, and how much uncertainty pre-vails among its leaders.

Overall, we see areas of concern that could nega-tively impact the A&D industry, even though the defense sector is poised for strong growth. These concerns include US executive orders to ban travel and electronic devices from certain countries – a move that has already led to cancelled flights. The possibility of a retaliatory trade war with China is another area to watch, since that would harm Boe-ing significantly: in the 12 months before May 2017, Boeing delivered 124 planes to China.

In addition, we found tier-1 suppliers in particu-lar have an optimistic view of the civil market for

the coming years, despite the harsh rhetoric from the US about trade and the possibility of trade sanc-tions. This contrasts with Europe-based OEMs who remain rather pessimistic.

The "preparedness paradox" captures the idea of feeling good about things one cannot change but ill-prepared in areas where your company can take big strides forward. Whether the business risk comes from geopolitical uncertainty, new market players or major shifts in industry models, the best way to counterbalance that risk is to proactively ad-dress internal challenges – e.g. to address the very points leaders say they’re not prepared for, such as digital transformation and social change.

Now is the time to take to heart the message giv-en by industry leaders: "Strategy is back!"

CONCLUSION: STRATEGY IS BACK AND HERE TO STAY

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AEROSPACE INDUSTRY:TURNING POINT AHEAD?A&D Management Issues Radar 2016

Although most industry experts foresee further growth in the civil aerospace sector, the outlook is less positive than in 2015. Two thirds of the participants in the civil sector expect growth to continue for the next five years or beyond. And yet, there is a slight feeling that the turning point is just down the road and that steady growth may soon be a thing of the past.

TAILWIND FOR THE AEROSPACE INDUSTRYA&D Management Issues Radar 2015

There are buoyant market conditions in the civil aerospace sector, but government spending on defense in Europe has declined. After years of focusing on program management and global market development, OEMs and suppliers alike are concentrating on reaching higher production output, and we expect this to remain their main concern in the near future.

Roland Berger, founded in 1967, is the only leading global consultancy of German heritage and European origin. With 2,400 employees working from 34 countries, we have successful operations in all major international markets. Our 50 offices are located in the key global business hubs. The consultancy is an independent partnership owned exclusively by 220 Partners.

Navigating Complexity For half a century, Roland Berger has helped its clients manage change. Looking at the next 50 years, we are committed to supporting our clients as they conquer the next frontier. To us, this means navigating the complexities that define our times. We help our clients draft and implement responsive strategies essential to success that lasts.

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A&D Management Issues Radar 2016

Aerospace industry: turning point ahead?

THINK ACTBEYOND MAINSTREAM

BEYOND MAINSTREAM

MAY 2015

TAILWIND FOR THE AEROSPACE INDUSTRYA&D Management Issues Radar 2015

http://https://www.rolandberger.com/en/press/A-D-Management-Issues-Radar-2016.html

https://www.rolandberger.com/de/Publications/pub_tailwind_for_the_aerospace_industry.html?country=WLD

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This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use of the information contained in the publication.

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EditorDR. KATHERINE NÖ[email protected]

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INTERNATIONAL A&D EXPERTSWilfried Aulbur (India)Mehdi Lalou (Morocco)Rodrigo Custodio (Brazil)Aurore Prouvost (France)Roberto Crapelli (Italy)Julien Bzwoski (France)Alain d'Oultremont (Belgium)Damien Dujacquier (Singapore)Thibault Dupont (France)Dominique Gauthier (Canada)Emmanuel Godard (Canada)Francois Guenard (France)Stephan Baur (Germany)Houssem Jemili (Saudi Arabia)

Soosung Lee (South Korea)Holger Lipowsky (Germany)Jens Nackmayr (Great Britain)Pierpaolo Mamone (Italy)Maria Mikhaylenko (Russia)Neranjana de Silva (Great Britain)Luz Matres (Spain)Sloka Roy (India)Vatche Kourkejian (UAE)Alex Xu (China)Oliver Hazimeh (United States)Artem Zakomirnyi (Ukraine)Jeff Yu (China)

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Aerospace & Defense Top Management Issues Radar 2017 · il aerospace and defense sectors. However, this year, we see that "Strategy" is back on industry executives' minds, since the