- Cost-reduction is top of agenda for A&D sector, as companies pursue transactions to protect market share, according to a 2013 KPMG survey of global A&D senior executives.
- Concern over lagging supply chain response to changing demand and poor visibility of suppliers beyond tier 1.
- Inward R&D investment driven by location of research universities.
Aerospace and Defense organizations are looking to transactions activity to preserve their market position and to reduce supply chain risk, according to the 2013 Global Aerospace & Defense Outlook released today by KPMG. The report finds that the A&D sector’s key challenges - worryingly low supply chain visibility and a poor response to fluctuating demand - point to sometimes weak collaboration with suppliers and partners.
Transactions key to maintaining market position with increased efficiency
Locating efficiency savings continues to be the main priority for A&D executives, with more than half (53%) citing reducing costs as their primary business objective. This was more important than either increasing speed to market (40%) or sales growth (23%). Over one in three respondents cited “sharing functions/ facilities with other organisations” as a way to increase efficiency, while 33% said that they would cut overall expenditure by reducing labour costs.
The survey also indicates that A&D organizations will undertake transactions to protect their place in the sector’s value chain. More than half of the larger A&D OEM respondents said that their transactions would allow them to preserve critical mass or increase their market share. 40% of A&D suppliers said that it would reduce supply chain risk by limiting their exposure to input price volatility and dependence on lower-tier suppliers.
Glynn Bellamy, UK Head of Aerospace at KPMG commented:
“These findings highlight the resurgence of M&A in the A&D sector and the conflicting challenges facing the Defence and Civil sector. Whilst the former is driven by declining markets and a need to drive down cost in the face of budgetary constraints the latter is experiencing a degree of increased vertical integration propelled by the OEM’s desire to take greater control over their supply chain in light of the looming ramp up in civil production rates driven by B787, A350 and the upgraded single aisle aircraft. In addition, vertical integration may reduce the risks posed by the operational capacity of many of the lower tier suppliers and concerns over their financial stability. This drive to vertical integration was demonstrated recently with the acquisition of Avio by GE.”
Lack of supply chain agility is major concern
Supply chain dysfunctions continue to be a major headache for A&D companies. A lack of supply chain visibility was particularly notable within the A&D sector, where a worrying 63% said they had no visibility beyond their Tier 1 suppliers, versus 41% of non-A&D manufacturers. One in ten of A&D respondents admitted to having no supplier visibility at all.
The opacity of the supply chain may contribute to the A&D sector’s number one supply chain challenge: aligning operations to real time fluctuations in customer demand. Nearly half of all senior executives surveyed singled out their lack of supply chain agility as an issue, compared to poor supplier performance (35%) or insufficient skilled talent to manage the supply chain (16%).
Closer collaboration with their suppliers may not only improve supply chain visibility and responsiveness to demand, it would also be likely to have a concrete impact on the performance of R&D. According to senior executives, the largest obstacle to innovation is the complexity of collaborating with suppliers and partners. 37% believe that this makes their R&D activities less effective, while only 2% said lack of funding was an issue. One in three is seeing a resurgence in their innovation activity, with over half saying that their R&D activity would contribute 10 - 15% of their revenue in the next two years.
Glynn Bellamy, UK Head of Aerospace at KPMG said:
“These global findings resonate in the UK supply chain, which remains highly fragmented compared to many industries and where many SME’s face the challenge of financing and resourcing the expected ramp up in end customer demand. There is therefore a need for increased collaboration across the supply chain. This has been recognized, in part, through the establishment of the Aerospace Growth Partnership – bringing together the various stakeholders in the UK supply chain.”
Research universities drive R&D destination choice
While the survey suggests that effective collaboration is at the heart of all R&D activity, the value gained from joining forces with higher education institutions is particularly noteworthy. When asked which factors would determine where they would set up their R&D function, the most important factor was the potential to collaborate with research universities. Nearly half of senior A&D executives cited the importance of working with higher education institutions, compared to only 27% for other manufacturing executives. Establishing a strong relationship with research universities was more important than financing options (33%), IP protection (25%), or government tax incentives (17%).
Glynn Bellamy commented:
“These findings support the invaluable contribution the jointly government and industry funded UK Aerospace Technology Institute (ATI) can make to the UK Aerospace sector. The Institute should form a clear strategy between academia and industry focused on the applied technology required to ensure that the UK maintains and grows its work share on future aircraft programmes. UK Aerospace PLC must now promote this and associated initiatives on the global stage, so that we are able to increase our share of inward investment from the global aerospace industry.”
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About the research
This Global Aerospace and Defense Outlook is part of KPMG’s 2013 Global Manufacturing Survey. Data was collected by the Economist Intelligence Unit from November 2012 until January 2013 and accompanying analysis was provided by senior KPMG A&D leaders from across the firm’s global network of A&D practices. A total of 335 senior manufacturing executives participated in the survey, of which 17 percent came from the A&D sector. Forty percent of the A&D respondents identified themselves as being based in North America, 32 percent in Western Europe and 19 percent in Asia. Almost half (43 percent) of all A&D respondents held C-Level positions within their respective organizations with a further 41 percent representing SVP/VP/Director or Head of department roles.
About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 156 countries and have 152,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.