With low expectations for growth within the global economy, aerospace and defense (A&D) organizations will need to focus on improving supply chain visibility, managing costs and creating new growth opportunities in order to remain profitable in the future, according to KPMG International’s 2013 Global Aerospace & Defense Outlook.
“These have not been easy times for the aerospace and defense sector. On the commercial aerospace side, backlogs have hit record levels and projections show that growth is not likely to let off anytime soon. For the defense sector, the picture is somewhat more challenging as governments slash defense budgets to balance the public books,” noted Doug Gates, KPMG’s Global Head of Aerospace and Defense. “This survey seems to clearly show that organizations in both the aerospace and the defense sectors will need to undergo a paradigm shift if they hope to enhance their margins, retain their balance sheet strength and grow their competitive advantage.”
The 2013 Global Aerospace & Defense Outlook identifies a number of priority areas for A&D executives seeking to drive business growth in today’s challenging environment.
Not surprisingly, supply chain issues bubbled up to the surface. A lack of supply chain visibility was particularly notable within the A&D sector where only 27 percent of respondents said they had visibility past their Tier 1 suppliers, versus 41 percent of non-A&D manufacturers. Nine percent of A&D respondents admitted to having no supplier visibility at all.
Managing costs also continues to be a priority focus for A&D executives, particularly within the larger OEM organizations where expectations for global growth top out at an anemic 2 percent. As a result, more than half (53 percent) of all A&D respondents said that they would be focusing on reducing their cost structure as their top strategic priority for the next two years.
To achieve this, almost half said they would jettison unprofitable or non-core product lines and business units while more than a quarter indicated that they would cut back planned investments. Larger sector OEMs were particularly focused on reducing investment over the next 48 months.
“While – on the surface – the data seems to indicate an era of sluggish growth and reduced investment, the underlying trends suggest that the sector will likely emerge from the uncertainly stronger and more profitable than before,” added Doug Gates.
The survey finds that many A&D organizations are also keenly focused on achieving growth in this market. More than three quarters of all A&D respondents said they expected to achieve growth by enhancing existing product lines and services while less than a quarter said their focus would be on breakthrough or ‘disruptive’ research and development.
In particular, A&D executives indicated focusing their research on areas that will help differentiate their products by, for example, reducing their price points, delivering dramatic improvements in product quality over the lifetime, developing environmentally friendly products and services, and creating better technology platforms.
“We have started to see a significant move globally towards ‘repurposing’ existing A&D products, services and business models laterally into adjacent markets,” noted Doug Gates. “A new solution in cyber security – a key requirement for the A&D sector – may also play well in the financial services sector, for example, while unmanned aircraft designed for the defense sector are showing their value as a vital tool in areas such as border security and protection for major events.”
The survey also indicates that A&D organizations are considering conducting transactions to solidify their place in the sector’s value chain. More than half of the larger A&D OEM respondents suggested that their transactions would be focused on maintaining critical mass or increasing their market share; 4 in 10 A&D suppliers said they would focus their transactions on reducing exposure to input price volatility and dependence on lower-tier suppliers.
“We expect to see an increase in the number of partnerships and joint ventures being developed within the sector as organizations seek to shore up their capabilities in new markets and deliver compelling new value propositions from existing service offerings,” summarized Doug Gates. “I would not be surprised to also see new collaborations forming between A&D organizations and non-aligned industries such as telecoms or consumer electronics.”
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 in November 2012 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.
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