Evolution and trends in Aerospace & Defense
Stephane Albernhe, Senior Partner at Roland Berger Strategy Consultants in Paris, a leading global strategy consulting firm, is responsible for the global Aerospace & Defense (A&D) Competence Center. Contact mag asked him to provide his view of the state of this industry and the trends for the future.
Contact mag: What trends do you see in the Defense industry?
Stéphane Albernhe: The Defense industry, as opposed to other sectors, is characterized by relatively long development cycle times. The programs that are running today and whose budgets were allocated prior to the events of 2008 were not impacted by the financial crisis. Today, however, governments are looking for ways to reduce spending and the defense budget starting from 2011, will begin to experience a shortage of funds for new programs. A&D companies are focusing their efforts on three areas:
1. Obtaining an agreement of principle from their customers to secure already approved and budgeted programs.
2. Ensuring that there is commitment on planning and associated milestones that will guarantee financing for the duration of the program and cash flow for the company.
3. Securing a commitment from customers regarding the number of units being ordered. In addition to securing key programs, defense companies are shifting from a product-oriented offering to one that encompasses solutions and services as well. The reduction of resources caused by the end of compulsory conscription has forced the military to professionalize its activities. It has generated a need to outsource many non-core activities to solution providers to reduce their costs. To do this, defense companies need to target a larger customer base and propose a global solution that not only includes the weapon systems or other military products themselves, but the implementation, maintenance and value added services for a longer period of time. This can even include asset ownership. By outsourcing a larger scope for a longer period of time to defense vendors, the military benefits from economies of scale that reduce the overall cost. Defense companies with long term contracts will make necessary investments resulting in increased competitiveness.
This new focus on solutions from implementation through maintenance means defense companies now compete against large IT groups that are already well advanced in global service solutions involving network and telecommunications, business intelligence, data management, real-time processing and logistics. Having limited knowledge in the pure service business, defense companies need to figure out how to respond to these new requirements and we foresee strategic alliances between defense and IT leaders in the near future.
“Companies like Embraer and Sukhoi are developing planes that will address the same market as their larger competitors, like Boeing and Airbus. It will change the rules of the game.”
Senior Partner, Roland Berger Strategy Consultants, Paris
The European defense market, contrary to the US market, is smaller and more open to non-domestic competition. The same economies of scale enjoyed by US companies bidding for domestic contracts cannot be achieved in Europe. This generates challenges for European defense companies that will have to be more competitive to keep or gain market share.
The last trend is the shift from defense toward, what the Americans call, Homeland Security. Recent world events call for reinforced attention to nations’ safety (coastline, borders, interior), which is why programs linked to national security have benefited from a surge in funding. For example, there is increasing demand to digitally model an entire territory and to simulate a threat to determine the best and most efficient response. Anticipating and simulating potential threats in advance can help identify weak points that can be corrected.
Contact mag: What is the status of the European space program?
S. Albernhe: Following the recent recapitalization of Ariane Espace, it has become clear that maintaining a foothold in the space industry is a question of national sovereignty. It is also a sector where maintaining skills and knowledge, which are very specific to this industry, at the highest possible level between two programs is very difficult. Even though the space industry is government-subsidized, it is nevertheless important to maintain leadership and increase productivity to protect market share, otherwise, it would require governments to subsidize even more to keep the space industry afloat. A meaningful space policy depends on two things: the ability to propose a visionary program over time and the ability for companies to make the necessary adjustments to be as cost efficient as possible to remain competitive.
Contact mag: What challenges does the civilian aircraft industry face?
S. Albernhe: Regional aircrafts are doing considerable soul searching to determine where they stand with respect to large commercial aircrafts (LCA). Companies like Embraer and Sukhoi are developing planes that will address the same market as their larger competitors, like Boeing and Airbus. It will change the rules of the game. Many targeted airlines are strategic customers for LCA companies, which is why they are implementing commercial strategies and the associated lobbying to secure their market share and prevent newcomers from coming in.
Another area where there is competition involves acquiring raw materials. Suppliers that have been contracted to provide huge quantities of aluminum or titanium, for example, for a long period of time, will consequently be tied up working with their strategic partners; there will either be fewer raw materials for the others or their time to market will increase.
Contact mag: What other issues are of concern to the A&D industry?
S. Albernhe: We see more and more the issue of Product Policy on a CEO’s agenda,which is about designing architectures that are increasingly modular and that enable reuse across different products. This type of reuse will increase productivity and competitiveness, help reduce overall costs, and enable companies to penetrate new markets. Managing a globally dispersed supply chain is also a major focal point for A&D companies. Companies might have an aircraft designed in one country and assembled in another using components from the US, Europe or Asia. All this needs precise orchestration, organization and professionalism in execution.