Reminded me of the article that matt posted about Russian groups that were considering downsizing and/or consolidating. Tough economic times, people, tough times.
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Date Posted: 12-Apr-2004
JANE’S DEFENCE WEEKLY – APRIL 21, 2004
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Wake-up call for UK aerospace
Nick Cook
Increasing competition is threatening the future of much of the UK aerospace industry. Nick Cook reports.
The UK’s capacity to provide industrial support for its armed forces in times of crisis could be fatally impacted by a wave of bankruptcy and business failures that is threatening to wash through the lower levels of the country’s aerospace and defence industry, a market report warns this week.
The threat to these companies, the so-called Tier 3 and 4 small- to medium-size enterprise (SME) base, comes from ‘low-cost supplier’ (LCS) nations such as China, India and the Czech Republic, which have demonstrated a marked ability in recent years to win significant aerospace and defence business from UK prime contractors and their major suppliers.
The evidence suggests that this level of business is set to increase further as UK prime contractors wrestle to reduce the escalating costs of ‘global’ aerospace projects such as the Lockheed Martin F-35 Joint Strike Fighter and Airbus A380.
The market report, ‘A Study into the Loss of UK Aerospace Jobs to Low Factor Cost Countries’ by Bravura Consulting Ltd, identifies as many as 15 countries in Asia, Eastern Europe and South America that are winning business from UK prime contractors and their major subcontractors to the cost of the UK SME base.
“Historically, Western economies provided the brains and the low-cost sources provided the brawn, but this is no longer the case,” says Bert Hunter, managing director of Bravura Consulting and author of the report. Asian companies in particular are matching a developing ability to provide high-quality, low-cost aerospace components and subsystems to the growing purchasing power of their governments for new products like the Airbus A380 and the Boeing 7E7.
Requirements to deliver offset commitments on these and other programmes, the relentless pressure on prime contractors to reduce costs and the ability of e-commerce and e-collaboration technologies to transcend national barriers all point to an increased reliance by companies like Airbus and Rolls-Royce on low-cost suppliers. Compounding the woes of UK SMEs is the weakened state of the US dollar.
George McAuley of the North West Aerospace Alliance is quoted as saying in the Bravura report: “The big prime contractors like BAE Systems, Rolls-Royce and GKN are placing work with low-cost manufacturing countries. They are complaining that, because of cost pressures, they have to subcontract work to the Far East and Eastern Europe. The question is how to get the aerospace manufacturing sector to be competitive so that the big contractors will place their work here . . . From my perspective I think the industry is on the edge of a cliff.”
There is no disputing, however, the requirement to strip more cost out of the product. All the big prime contractors – from Airbus to Boeing, Lockheed Martin and EADS – are demanding cost savings that ripple down the supply chain. “The pressure on cost is inexorable,” says Fred Aughton, head of aerostructures at GKN Aerospace. “If UK SMEs can’t meet our projected needs, we’ll have no choice but to take more of our business elsewhere.” In placing its business with low-cost suppliers, GKN is finding that it can strip between 25-50% from the cost of a UK-sourced component or small subassembly.
Ross Bradley, who heads the Farnborough Aerospace Consortium (FAC), a regional association that represents more than 100 aerospace companies in the southeast of England, agrees with the report’s conclusions that significant numbers of the UK’s Tier 3 and 4 suppliers could disappear unless prompt action is taken. “Once that work has gone, it will never come back,” he says.
Inevitably, there are fears that the UK’s aerospace sector – what the report refers to as “the last remaining major UK manufacturing industry” – will go the way of the country’s once-thriving automotive, shipbuilding, steel and electronics industries.
Many of the UK’s SMEs are family-owned firms that can point to a long history of involvement in the UK aerospace industry.
“In the modern world, factories no longer compete, rather supply chains compete,” says Hunter. “Primes and Tier 1s have considerable power to reshape and restructure the industry through the implementation of supply base rationalisation and strategic sourcing programmes.
“Their increased scale also gives them the muscle to make the investments in the development of low-cost global sources and infrastructure that will support their longer-term market access objectives.”
GKN’s Aughton says that his company has been formulating its supply-chain strategy for years and that, if they are to survive, the UK’s SMEs must do likewise. He, alongside other senior executives in the UK aerospace industry, is keen to see a halt to the decline.
“The death of the UK supply chain is in no one’s interest,” Bradley says. As low-cost suppliers raise their game technologically, so their prices will increase. UK SMEs, he adds, need to refocus on their core competencies and move up the value chain. Significantly, according to Bradley and others, there is high-level support within companies like GKN, BAE Systems and even Boeing, which has invested heavily in the UK supply chain, for strengthening the UK SME base.
One immediate solution is for UK suppliers to form ‘clusters’, alliances based on geographical proximity or complementary capabilities. These would allow UK SMEs to build the economies of scale needed to leverage partnerships with low-cost sources. The FAC is involved in building such a network, as are other regional aerospace alliances in the north west and southwest of England.
There is also the defence of the realm to consider. Without a strong SME base to fall back on, there are obvious strategic implications, but so far the UK government has failed to intervene.
“The French actively support Airbus and the US supports Boeing,” a senior aerospace executive is quoted as saying in the Bravura report. “The UK plays the game and our competitors don’t.” Protectionism, however, is not the answer, according to most of those polled in the Bravura report. What is needed, they believe, is a national strategy that joins the dots in the UK’s disparate aerospace and defence sector, linking industry, academia, government and trade organisations; a vision for where it needs to be in 20-30 years’ time.
The seeds of such a strategy are being sown by the Aerospace Innovation and Growth team, a multidisciplinary body headed by BAE chairman Sir Richard Evans.
Because China and India recognise the value of high-tech industries like aerospace, they are prepared to invest at government level in new capabilities such as composite manufacture – another reason why they are winning business from aerospace primes all over the world, including the UK’s.
The Bravura report indicates that the proportion of UK SMEs using low-cost supplier nations for production components is just 4%. Despite overwhelming evidence of foreign out-sourcing at the prime and major supplier levels, 74% of the UK SMEs polled said that they did not believe they had lost work to low-cost sources.
“This report is very timely,” adds Keith Hayward, of the Society of British Aerospace Companies. “It confirms trends that were evident two years ago and were beginning then to have an impact. It’s a wake-up call to a large chunk of the UK aerospace industry.”
Nick Cook is a JDW Aerospace Consultant, based in London
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April 19, 2004 at 9:02 pm