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2013 GlobalAerospace & Defense

Outlook


http://slidepdf.com/reader/full/aerospace-defense-outlook-2013 2/16© 2013 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.



About the surveyThis Global Aerospace and Defense Outlook is part of KPMG’s 2013 Global

Manufacturing Outlook 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 KPMG’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. The views reflected in this Global Aerospace

and Defense Outlook include those from 14 large OEMs (“large OEMs”), defined as

companies with revenues of US$10 billion or more, and 43 medium-sized organizations(“suppliers”), defined as companies with revenues of between US$500 million and

US$10 billion.

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.

© 2013 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.



These have not been easy times for the aerospace and defense (A&D) sector. On thecommercial 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.

But with continued economic uncertainty ahead, it seems clear 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.

This Global A&D Outlook report provides ample evidence that some of this necessary

change is already underway. Large A&D OEMs (original equipment manufacturers) were

30 percent more likely than the industry average to say they would be cutting back or

delaying planned investments and almost 10 percent more likely to say they would exitunprofitable product lines in the next 2 years.

Some may say this is simply a “hunker down” mentality; others would suggest these

organizations are focused on trimming fat and growing their core business to prepare for

the future. Success for some is in “repurposing” their existing products, services and

business models laterally into adjacent markets. The next few years should also see a rise

in the number of A&D organizations expanding into new global regions.

This sector report – reflecting the views of the vast majority of the sector’s large OEMs

and suppliers from around the world – dives into the challenges and explores the

opportunities present in today’s A&D market and offers some practical and forward

looking insight for players around the world.

To discuss these – or any other issues currently facing your A&D organization, I encourage

you to contact your local KPMG member firm or one of the contacts listed at the back of

this publication.

Foreword

Doug GatesGlobal Head of Aerospace and Defense




Continued emphasis on

managing costs

Renewed focus on the supply chain

Achieving growth in new markets

Conclusion

How KPMG can help

2

5

8

10

11

Contents




Continuedemphasison managing costsA&D executives around the world are

heavily focused on reducing their cost

base. And rightfully so: with almost

80 percent of large OEM respondentssaying that growth over the next two

years will likely top out at an anemic

two percent, it seems clear that any

additional bottom line growth will need

to be realized off the back of further

cost reductions.

It’s not surprising, therefore, that

more than half (53 percent) of all

A&D respondents said that reducing

their cost structure would be their

top strategic priority for the next two

years. The emphasis on cost cutting is

particularly keen within the large OEM

segment of the market where more

than seven in ten respondents put

cost cutting as a top priority.

But with most of the “low-hanging

fruit” of cost optimization already

plucked, many sector executives

are now starting to re-examine their

structures and business models to

identify sustainable opportunities for

eliminating costs.

Almost half of all A&D respondents

said they will exit unprofitable or

non-core product lines and business

units while more than a quarter said

Over 2%

reduction

1-2%

reduction

0.1-0.9%

reduction

No growth0.1 to 1.9%

growth

All A&D respondents Large A&D OEMs

2-3% growthOver 3% growth

A&D companies predict 0-2% growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

4%0%

22%

14%

36%

79%

15%

7%11%

0%

8%

0%2%

0%

Source: Economist Intelligence Survey, Nov. 2012

Q: What is your outlook for the global economy over the next 12 to 24 months? Select one.

More than

half of all A&Drespondents saidthat reducing theircost structurewould be their topstrategic priorityfor the next

2 years.

2 | 2013 Global Aerospace & Defense Outlook




A&D companies exiting unprofitable or non-coreproduct lines and businesses

Sharing functions

and/or facilities

with other

organizations

Acquiring

suppliers to

stabilize

input costs

Exiting

unprofitable

or non-core

business units

Exiting

unprofitable

or non-core

product lines

Cutting back

and/or delaying

planned

investments

Reducing

labor

force/costs


0%

10%

20%

30%

40%

50%

60%

40%

36%

27%

57%

41%

50%

41%43%

37%36%38%

36%


Q: What are the priority areas of cost-control that you will pursue over the next 12 to 24 months? Select top three.

they would cut back or delay planned

investments. Interestingly, the large

OEMs were more than twice as likely

as the sector average (or, indeed, thewider cross-sector sample) to point

to reductions in investment levels,

suggesting that it may be some time

before investment truly starts to

percolate down through the sector.

Yet 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 uncertainty stronger and more

profitable than before. Further

consolidation, for example, should leadto more resilient supplier networks;

the divestment of non-core operations

should ensure that future capital is

focused on areas that can deliver long-

term value; and cuts in investment

levels should lead to more joint

ventures and cooperative approaches

to sharing both costs and risks.

2013 Global Aerospace & Defense Outlook | 3© 2013 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.



Generally speaking, Brazil’s A&D sector

is influenced by two main government

departments: the Civil Aviation Secretary

(Secretaria da Aviacao Civil) and the Ministry of

Defense (Ministerio da Defesa).

The Secretaria da Aviacao Civil is largely focused

on facilitating the process of transferring airport

concessions and privatizations to the private

sector and has recently made good progress

with the granting of concessions for three

major airports: Guarulhos in Sao Paulo (Brazil’s

main passenger airport), Viracopos in Campinas

(Brazil’s main cargo airport) and Brazilia (the

national capital). Plans are already in place for

the next round of concessions which should

include Galeao in Rio de Janeiro. But while the

concession process is going well, it has had

an impact on the aerospace sector, particularly

within the regional carrier business.

The Ministerio da Defesa commands the largest

government budget with operating budgets of

BRL57 billion (US$28 billion) and an investment

budget of BRL8 billion (US$3.9 billion). Yet while

the defense ministry may have a wide range

of projects now under their direction, foreign

defense players will find entering the market

to be a challenge without the benefit of local

partners.

One particular area of opportunity for the

defense sector, however, is in the provision

of security products and services. As Brazil

prepares to host the FIFA World Cup in 2014 and

the Summer Olympics in 2016, these services

will be in high demand.

Jarib Fogaca

Aerospace and

Defense Sector

Leader

KPMG in Brazil

KPMG Insight

Enhancing cooperation to drive cost savings

While many A&D sector leaders seem keen to

“stick to their knitting” by focusing on the core

business and reducing investment, the reality is

that more fundamental cost cutting measures

will be needed to raise margins and navigate

through the current market uncertainty.

Yet as I travel around the world speaking with

sector executives, I often find that many of the

opportunities for cost reduction that are already

commonplace in many other manufacturing

sectors – shared services, collaborative supplychain platforms and consolidated infrastructure,

to name a few – have yet to be widely adopted

within the A&D sector.

Taking advantage of these proven opportunities

will require A&D organizations to focus on

improving collaboration across both their

internal structure and their wider supplier

network. And while this may occasionally add

some complexity, the cost and risk-sharing

advantages can often be significant.

Getting there, however, will not be easy.

Executives will need to encourage a

transformative paradigm shift where sacred

cows and ingrained ways of working are

challenged and walls are broken down to

encourage greater collaboration. Relationships

up and down the supply chain will need to be

enhanced, likely with the help of enabling IT

platforms. New processes and governancemodels will also be required, particularly where

sensitive data is being shared between divisions

and partners.

Those that are able to navigate through these

complexities, however, should emerge as not

only fitter and more cost-effective organizations,

but better able to take advantage of new cost

reduction opportunities that arise in the future.

Doug Gates

Global Head of

Aerospace and

Defense

KPMG Insight





all. This is a particular challenge for the

sector’s large OEMs who – in their

transformation towards end-product

integrators – have largely contracted

the supply risk out to their Tier 1

suppliers and, as a result, have lost

visibility into the more distant part oftheir supplier network.

Given the current cost pressures

and ongoing demand volatility in the

market, we expect to see further

consolidation within the A&D supplier

networks. Indeed, our survey finds

that – of the A&D respondents

representing sector suppliers – four in

ten said that their organization’s goal

in pursuing transactions was to reduce

exposure to input price volatility and

dependence on third party suppliers.

The A&D sectorwill need to place

a much higher

focus on improvingsupply chainintegration.

Renewed focuson the supply chainIf events of the past year have made

anything clear, it is that the A&D sector

will need to place a much higher focus

on improving supply chain integration.

Delivery delays in the aerospace sector,

demand volatility in the defense sector

and increasing incidences of supplychain disruptions across the board

have shown that greater visibility and

cooperation will be needed.

But according to our survey, A&D

organizations have far less visibility

into their supply chains than peers in

other sectors. Only around a quarter

(27 percent) of A&D organizations

said they had visibility past their Tier 1

suppliers (versus 41 percent of non-

A&D respondents) while nine percent

said they had no supplier visibility at

Significantly less visibility into their supply chains

No visibility –

little to no Tier 1

supplier visibility

Some visibility –

limited Tier 1

supplier visibility,

but not Tier 2 and

beyond

Enhanced visibility –

Tier 1 supplier

visibility and

some Tier 2

supplier visibility

Complete visibility –

Tier 1, 2, and beyond

suppliers visibility

0%

10%

20%

30%

40%

50%

60%

70%

7%9%

4%

57%

63%

49%

29%23%

32%

7%4%

9%

All A&D respondents Large A&D OEMs All manufacturers


Q: How much visibility of supply and capacity information do you have across your suppliers and logistics partners? Please select one.




But while, for the most part, the large

OEMs will cheer any transactions

within the supply network that will

lead to greater security of supply

and lower costs, none of the large

OEM respondents to this survey

indicated a desire to purchase suppliers

themselves.

Where the large OEMs do need to

focus, however, is on removing any

obstacles slowing supply chain signals

from moving around their supply chain

network. Already almost half of all A&D

suppliers report encountering significant

challenges in aligning operations to real-

time fluctuations in customer demand

while a quarter point to problems with

ensuring sufficient supplier capacity to

meet existing demand.

0%

10%

20%

30%

40%

50%

60%


Significant challenges in aligning operations to real-time

fluctuations in customer demand

26%

21%

Ensuring

sufficient

supplier

capacity to

meet demand

14%

21%

Lack of

skilled talent

to manage

supply chain

execution/

planning

35% 36%

Supplier

performance

in terms of

risk, reliability

and quality

49%

43%

Aligning

operations

to real-time

fluctuations

in customer

demand

9%

29%

Inadequate

IT systems

for supply

chain visibility,

planning and

execution

9%

21%

Lack of

information

and material

visibility across

the extended

supply chain

2%0%

Inefficient

supply

chain tax

structure


Q: What are the top challenges facing your supply chain? Please select top two.





Becoming truly demand-drivenAs A&D organizations look to become

leaner and more cost efficient, a

growing number are starting to move

towards”demand-driven” supply

chains where all planning, purchasing

and replenishment are aligned with

actual demand at the furthest point of

consumption.

But with the vast majority of A&D

respondents (71 percent) saying that

they still rely on forecast demand forat least part of their manufacturing,

purchasing and replenishment

decisions, it is clear that more can

be done within the A&D sector to

establish multi-tier visibility and

eliminate information latency across

the supply chain.

To achieve this, A&D organizations will

need to shift their thinking away from

traditional “supply chains” and instead

towards the concept of highly integrated

“supply networks” where multiple tiersof companies are working off the same

shared view of total demand and total

available supply with common processes

and metrics.

The promise of integrated value chain

networks has already been achieved

successfully in several other industries,

and the advancement in technology

solutions has only made this integration

easier. Indeed, experience has proven

that the best-designed demand-

driven networks are those developed

in collaboration with key suppliers/ customers and rolled out through an

iterative approach with continuous

process improvement measured

against a shared benefits model.

Business leaders should note, however,

that this is often an emotional journey

replete with its own highs and “valleys

of despair”. But those that are able to

manage the transition effectively will

find that demand-driven approaches

may allow A&D organizations to

leapfrog their competitors and sustaina competitive differentiation for an

extended period of time.

KPMG Insight

Rob Barrett

Managing

Director,

Advisory,

KPMG in

the US

Amit Gupta

Partner,

Advisory/

ManagementConsulting,

KPMG in

the US




While cost cutting may be front and

center for the A&D sector, growth also

remains a key priority. Of those A&D

respondents who are experiencing

a resurgence in innovation, most are

expecting to do this by enhancing

existing product lines and servicesrather than focusing on breakthrough

“disruptive” innovation.

In part, this speaks to the high capital

costs that are often associated with

breakthrough innovation. But it also

indicates that a greater emphasis will

be placed on exploiting potential market

adjacencies over the coming years.

And while almost a quarter say they

will invest in new innovation, the vast

majority of this investment will likely

be focused on areas that will helpdifferentiate 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.

In much the same way as

organizations are focused on

exploiting potential market

adjacencies to stimulate growth,

many A&D organizations are also

clearly seeking to grow through

transactions. Almost a quarter

(23 percent) of respondents from the

A&D sector and 44 percent of largeA&D OEMs said that any transactions

their organizations pursued would

likely be aimed at expanding into new

product segments or increasing their

geographic coverage, indicating that

some investment will be flowing into

new growth areas.

Given all of this, 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 innew markets and deliver compelling

new value propositions from existing

service offerings. And while some

of these will be traditional tie-ups

between suppliers and integrators, we

also expect to see new collaborations

forming between A&D organizations

and non-aligned industries such as

telecoms or consumer electronics.

Achieving growth in new marketsExpect to seean increase inthe number of

partnerships andjoint venturesbeing developed.





Achieving success in new market entry

While key global economies are scaling

down their defense expenditure, many

emerging markets – such as India – are

looking to do the exact opposite. This is good

news for the industry as new investment

will not only offer new growth opportunities

but should also lead to increased levels

of modernization, the implementation of

new technologies and the passing of muchneeded reforms.

However, some challenges remain for

foreign participants. For one, current FDI

limits (26 percent in India1) within the

sector are dampening investment but – for

the most part – these are expected to be

addressed in future.

Foreign companies will have also noted

recent policy changes announced by the

Indian Ministry of Defense that place a

strong emphasis on indigenization and

domestic procurement.2 As such, external

participants will want to focus on local brand

building rather than simply setting up a sales

presence and bidding on contracts.

So while the replacement of the Indian

defense forces’ outdated platforms may

be a high priority, it will be those that

demonstrate established relationships

and long-term partnerships with the local

industry that stand the best chance of

winning in the long run.

Those embarking on an emerging market

strategy should therefore start by taking a

good look at their investments in each target

country and assess the strength of their

local relationships and capabilities versus

the comparative strength of local market

competitors.

Neelu Khatri,

Head of Aerospace

& Defense

KPMG in India

KPMG Insight

30%

44%

Expand into new

product segments

or increase

geographical

coverage


48%

56%

Maintain critical

mass or increase

market share

(eg, targeting core

business segments/

geographies)

20%

0%

Reduce exposure

to input price

volatility and

dependence on

third party

suppliers

A&D companies to grow through transactions

0%

10%

20%

30%

40%

50%

60%


Q: Which of the following describe your organization’s goals in pursuing transactions? Please select one.

1 http://www.livemint.com/Companies/oFSyiqFgw6SV4WXzohMyrK/India-to-stick-with-26-FDI-in-defence.html?facet=print2 http://www.livemint.com/Home-Page/qOsh8IhMjSkHB9DNnlg8cP/Defence-procurement-policy-overhauled.html




ConclusionAs this Global A&D Outlook illustrates, today’s global marketplace representsa world of opportunity for aerospace and defense companies. But along with

opportunity comes an evolving set of challenges including:

• the growing need to partner with customers and suppliers to better reduce

development costs and share risks

• the complexity of identifying and divesting of non-core assets

• the drive for greater visibility deeper into the supply chain

• an ongoing effort to identify and capitalize on growth opportunities by leveraging

existing technologies into aligned industries or regions; and

• how best to maximize R&D investments to respond to changing customerdemands.

To prosper in this type of environment A&D companies must seek new approaches

that will help them navigate the challenges above and take advantage of the

opportunities that lie ahead.

So while both the data and KPMG professionals experience in the market suggest

that the heady days of double digit growth and unfettered optimism in the A&D

sector may have passed, we continue to see many opportunities for large OEMs

and suppliers to manage costs and drive growth within today’s environment.

Yet given that all signs point to slow measurable growth for the sector in the near-

term, the advantage will go to those that are able – and willing – to harness thesenew opportunities and explore new avenues for growth. Those that do not (or

cannot) will ultimately find the next few years to be very trying indeed.





How KPMG can helpAs a leading professional services firm to aerospace and defense companies,KPMG is committed to helping clients plan for the future. Nearly 1,500 Global A&D

partners and professionals provide industry-specific experience and work closely

with you to navigate the evolving complexities of global operations and value chains,

and unlock value for your organization, customers, and stakeholders.

KPMG professionals help A&D clients transform challenges into opportunities with

cross-functional industry knowledge, open collaboration, and an insightful approach

that’s tailored to each client’s situation and needs.

KPMG’s Audit, Tax and Advisory professionals support aerospace and defense

clients with deep technical and industry experience, and provide actionable

operational, financial, and regulatory insights that help you cut through complexity.




The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accu-

rate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should

act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International.

KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does

KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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Global Aerospace and Defense Leadership:

Additional contributors and country leaders:

Jeff Dobbs

Global Sector Chair,

Diversified Industrials

+1 313 2303 460

[email protected]

Doug Gates

Global Head of

Aerospace & Defense

+1 404 222 3609

[email protected]

Kai C. AndrejewskiAerospace and Defense Sector

Leader

KPMG in Germany

+49 211 475 7900

[email protected]

Glynn Bellamy

Partner

KPMG in the UK

+44 121 6096170

[email protected]

Luis Alejandro Bravo

Aerospace and Defense SectorLeader

KPMG in Mexico

+52 555 2468360

[email protected]

Ken DroverLead Partner, Defense Center of

Excellence

KPMG in Australia

+613 92 88 6623

[email protected]

Jarib Fogaça

Aerospace and Defense Sector

Leader

KPMG in Brazil

+55 19 2129-8700

[email protected]

Jean-Luc Guitera

Partner, Aerospace and Defense

sector

KPMG in France

+33 155 686962

[email protected]

Andrew Jackson

Partner

KPMG in the UK

+44 20 76941923

[email protected]

Ja Young Jo

Aerospace and Defense Sector

Leader

KPMG in Korea

+82 2 2112 0640

[email protected]

Neelu Khatri

Head of Aerospace & Defense

KPMG in India

+91 124 3074000

[email protected]

Grant McDonald

National Sector Leader, Aerospace &

Defense

KPMG in Canada

+1 613 212-3613

[email protected]

Marty Phillips

Global Head of Management

Consulting for Diversified Industrials

+1 678 525 8422

[email protected]

Laurent Des PlacesPartner, Aerospace and Defense

sector

KPMG in France

+33 155 686877

[email protected]

Alex Shum

Head of Diversified IndustrialsKPMG in China

+86 212 2122508

[email protected]

Michele HendricksGlobal Executive for DiversifiedIndustrials

KPMG in the US

+1 203 406 8071

[email protected]

Martha CollyerSenior Marketing Manager

KPMG in Canada

+1 416 777 3505

[email protected]

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