the state of aerospace and defense...the state of aerospace and defense 2020 4 priority #1 for oems...
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2020Accelerate competitive advantage in 2020 and beyond
THE STATE OF AEROSPACE AND DEFENSE
2THE STATE OF AEROSPACE AND DEFENSE 2020
With 2020 on the horizon, Aerospace and Defense (A&D) original equipment manufacturers (OEMs) are
challenged to bring the future into focus with 20/20 vision. And yet, a number of factors cloud their views,
including: the increasing frequency and size of mergers and acquisitions (M&A); chronic materials shortages
and rising prices; escalating global trade tensions; and the emergence of new competitors.
OEMs must do everything in their power to deliver the highest value to their customers and maintain a
competitive edge. This may require making adjustments to the value chain across the product lifecycle
to improve competitiveness and meet strategic growth objectives.
A&D AT-A-GLANCE OVER THE LAST 12 MONTHS
KEY M&A DEALS
United Tech + Raytheon
L3 + Harris
Mitsubishi + CRJ
TransDigm Group + Esterline Technologies
110 M&A DEALSwith a total value of
$58.3 Billionin Q2 2019 (PWC)1
A&DMARKET FORECAST
$8.7 Trillionover the next decade (Boeing)2
2
AN ERA OF RAPID CHANGE
3THE STATE OF AEROSPACE AND DEFENSE 2020
The Most Important Partnership Benefits
A recent study from Vanson Bourne commissioned
by Celestica confirms how critical the core
principles of the Acceleration Economy are
to OEMs as they collaborate with electronics
manufacturing partners to apply a more
holistic lens in re-evaluating their business.
In fact, the three most significant benefits cited
by respondents were:
70% INCREASING QUALITY AND EFFICIENCY
64% IMPROVING THE ABILITY TO MEET CUSTOMER EXPECTATIONS
56% EXTENDING INNOVATION THROUGH NEW SUPPLIER RELATIONSHIPS
Celestica calls the new era of rapid change, ‘The
Acceleration Economy’, where higher-than-ever
customer expectations, constant technological
innovation and globalized competition have
placed unprecedented demands on business.
What matters most right now is how organizations
adapt and prepare for the future.
In the A&D space, the change has been fast and
furious. Increased M&A activity and consolidation
is creating more complex, disparate and highly
fractured value chains; a global trade war could
bring additional tariffs and enforcement; and the
worldwide shortage of vital materials – such as
multi-layer ceramic capacitors – can extend
lead times to a full calendar year.
More companies recognize they need strategic
partners to help manage innovation, design,
production, quality and productivity challenges.
These partnerships are key to helping OEMs
achieve key priorities including:
• Extending innovation: OEMs want to become
more agile and focus on maximizing their
innovation capabilities and shortening product
development cycles.
• Putting quality and efficiency hand-in-hand:
Acquire parts cost effectively in lower cost
economies without sacrificing quality
and innovation.
• Making flexibility an imperative: Take a more
agile approach to better manage challenges.
4THE STATE OF AEROSPACE AND DEFENSE 2020
Priority #1 for OEMs is to clearly determine what
is core vs non-core to their business; enabling
them to stay competitive while delivering high
value to customers.
This requires a re-evaluation of the entire value
proposition, portfolio of service offerings and internal
business processes to determine what remains
essential to the company’s long-term success and
continued customer satisfaction – and what must
be outsourced to proficient providers to enable
a more acute focus on core activities. This better
positions OEMs to seize new opportunities in
design, licensing and the after-market marketplace.
Mergers and Acquisitions – More Pressure to Prioritize
A merger inevitably presents issues of product
redundancies that must be addressed quickly.
For decades, the M&A narrative was punctuated
by the acquisition of smaller shops. But last year
there was more consolidation among larger service,
licensing, and maintenance, repair and overhaul
(MRO) companies. The major players in these deals
shared a common goal: solidify partnerships with
the industry’s largest players such as Boeing and
Airbus by gaining the ability to deliver a wider
range of products and services.
Consider the merger of Harris Corp. and L3
Technologies finalized in July 2019, with a goal to
create the sixth largest defense company in the
U.S. and a top-ten defense company globally.
In an interview with Defense News, Harris CEO
Bill Brown said one of the new company’s priorities
is to determine which operations and product lines
are core vs. non-core.
THE BIG QUESTION – CORE OR NON-CORE?
“ Any time you put two companies with two
portfolios together and you rethink what strategy
you want to accomplish, there’s going to be
some pieces of the portfolio at the back end of
the bus. We have to look at where we want to put
our management time, capital, and (research and
development) investment. We can’t put it on pieces
that might not be as strategic.”
Bill Brown,
Chief Executive Officer, Harris Corporation
5THE STATE OF AEROSPACE AND DEFENSE 2020
Core vs. Non-Core: What Matters Most
• Every decision must account for the complete product lifecycle.
• Anticipate customer demands that can change suddenly and unpredictably.
• Partnerships matter – a lot. They contribute to the strength of the value chain and help OEMs identify
changes, pick up new ideas and fend off global rivals.
This report focuses on the three key areas of the product lifecycle experiencing the most impact as industry
players reassess their value chains and core vs. non-core priorities:
DESIGNING for EXCELLENCE THROUGHOUT the PRODUCT LIFECYCLE
IMPROVING SUPPLY CHAIN AGILITY
MAINTAINING LEGACY SYSTEMS and PRODUCT CONTINUITY
The 7 Questions OEMs Should Ask Themselves to Inform Core vs. Non-Core Decision Making:
Is there overlap in global footprint and logistics?
Is there a high potential for fragmented supply chains and low buying power?
Is there a lack of enforceable delivery and quality metrics?
Are there significant balance sheet and free cash flow challenges?
Are fixed costs growing?
Are there mature products that require long-term after-market support?
Is there differentiating IP in the manufacturing processes?
6THE STATE OF AEROSPACE AND DEFENSE 2020
DESIGNING FOR EXCELLENCE THROUGHOUT THE PRODUCT LIFECYCLE
Applying a “Design for Excellence (DFx)” approach is critical to managing
cost and vetting designs for manufacturability and long-term sustainability.
However, the rush to get a product to market quickly often prevents OEMs
from meeting these requirements. They may lack the tools, methodology or
resources to bring together all the necessary elements – supply chain, quality,
design, engineering, manufacturing, test and repair – to ensure the final
product meets cost, performance and reliability requirements.
Our recommendation is to work with partners to take a more holistic
approach to design - spanning the following areas:
Design for cost: Military unmanned aerial vehicles (UAVs) are
designed to fly for up to two days on surveillance missions at
altitudes of 60,000 feet. Others are loaded with 4,500 pounds
of weaponry.3 Commercial airlines are introducing direct flights
that require longer trips at higher altitudes. Every ounce counts
because adding more weight reduces speed, agility and flying time.
While OEMs are laser focused on meeting design requirements
related to weight, speed and agility, to stay competitive, they
must also ensure that designs meet cost, time-to-market, and
long term producibility goals.
Starting at the subsystem level, OEMs need to consider the parts
and components selected, the complexity of the design and the
fact that long lead times may impact component availability.
Robust supplier and part selection are key at the design stage to
ensure cost competitiveness, speed and quality; and to influence
the long-term viability of the product – even in the face of parts
shortages.
7THE STATE OF AEROSPACE AND DEFENSE 2020
Design for manufacturability and performance: This practice
ensures the early detection of manufacturing issues and reduces
any risk of production yield and volume ramp limitations -
critical factors to new technology integration.
For example, commercial airlines are flying further and longer;
military UAVs fly in both thin and frigid air and hot and dusty
desert regions; and radar systems are evolving into active
electronic scanner arrays with faster transistors that require
more power and generate more heat. Design engineers are
often challenged to figure out how to dissipate heat and shrink
form factors without sacrificing power. The right design analysis
and test strategies at the early design stage can help reduce the
risk of failure caused by thermal issues and enable a seamless
transition from design to manufacturing.
Design for obsolescence management: Selecting components
that will last the entire product lifecycle is also critical. If a part
becomes obsolete halfway through the life of a product, OEMs
have to be able to source, qualify and test alternates while still
meeting end customer expectations. This can drive significant
cost, tie up resources and impact delivery. Supply chain partners
who engage early in the product lifecycle can help OEMs plan
for obsolescence, and react quickly to unexpected issues such
as parts and materials shortages.
Value added value engineering (VAVE) strategies: OEMs may
need to redesign an existing system to meet specific price
points or to manage quality and reliability issues, yet many
don’t have these resources in-house. VAVE experts understand
the full product cycle and can collaborate with OEM designers
and production engineers throughout the redesign process
to ensure the best design, manufacturing and cost choices at
every step.
8THE STATE OF AEROSPACE AND DEFENSE 2020
While new product development is core to OEMs, partnerships greatly boost their capacity when it comes
to making designs manufacturable and scalable. They are even more valuable when it comes to redesign -
enabling OEMs to better manage interruptions and maintain a focus on areas that are core to their
business plan.
DESIGN FOR THE PRODUCT LIFECYCLE
EARLY DESIGN ENGAGEMENT drives
highest value, lowest risk
COMPLIANCE Adherence to the highest
industry standards
ONE-STOP SOLUTION Test solutions integrated
with manufacturing
Ensure the design
accounts for all stages of
the full product lifecycle
Meet compliance
requirements starting in
early stage design
Design-in test solutions
as part of the manufacturing &
product development process
FLEXIBILITY in the supply base
Integrate a failure and corrective ACTION PLAN
Incorporate a robust product OPTIMIZATION STRATEGY
React quickly
to unexpected parts
shortages or obsolete/
counterfeit materials
Data gathered from
analyzing failure and
root cause corrective
actions is integrated into
next-generation design
Include VAVE best
practices for cost
reduction, quality and
yield improvement
9THE STATE OF AEROSPACE AND DEFENSE 2020
IMPROVING SUPPLY CHAIN AGILITY
Three major factors are placing unprecedented pressure on the A&D supply chain, impacting an OEM’s
ability to meet cost, delivery and quality targets:
M&A Activity: The increase in mergers and acquisitions, especially among suppliers, can drive
added cost pressure for OEMs and suppliers throughout the supply chain. Actions focused
on lowering costs remain a top priority. Newly acquired entities must eliminate duplication,
drive rapid response to meet customer needs and meet their integrations objectives. While
this is not news to OEMs, how swiftly they adapt will be under unprecedented scrutiny.
Additionally, following the acquisition of many sub-tier casting and foundry companies, the
consolidated market puts added pressure on costs, supply chain processes and throughput.
Materials Shortage: A&D OEMs face surging demand
and additional strain from the automotive industry where
manufacturers are incorporating multi-layer ceramic capacitors
(MLCC) in their next-generation vehicles. Different industries
competing for the same parts can cause an average of a
40 to 52 week delay. With supply backed up for nearly a year,
companies are forecasting demand well in advance and risk
missing time-to-market commitments. Some MLCC suppliers
are adding capacity to meet demand but this will come with
higher prices and limited choices, ultimately affecting the
cost of the product in the market.
Potential Tariffs: New tariffs being debated by the U.S.
and across a wide range of products including steel and
aluminum loom as a significant possible impediment to
meeting customers’ high expectations. This situation is
fluid and has many potential outcomes. While companies,
politicians and industry representatives on both sides of
the Atlantic are proposing various measures to prevent
disruptions to global supply chains, OEMs’ financial teams
and defense customers could force the re-evaluation and
selection of alternate suppliers in the meantime.
Did You Know?every new TESLA MODEL 3 that hits the road uses anaverage of
9200 MLCCS.4
In a statement to The New York Times, an Airbus spokesperson said the proposed tariffs would serve only to exacerbate trade tensions and put companies around the world in a “LOSE-LOSE SITUATION.” 5
10THE STATE OF AEROSPACE AND DEFENSE 2020
Leverage Partners to Mitigate Disruption
OEMs need trusted supply chain experts to help them navigate and overcome their supply chain challenges.
Otherwise, they risk sacrificing their speed-to-market and ability to respond to customers’ emerging needs.
Key partnerships enable OEMs to create a more integrated supply chain – one that will pay dividends in the
long run. An agile and integrated ecosystem enables suppliers and their customers to identify remedies and
solutions to problems like materials or parts shortages – anticipating and addressing issues before they arise.
The Core Attributes of a Trusted Supply Chain Partner
Cultivates the right supplier relationships to enable greater flexibility, cost-efficiency,
expedient problem-solving and quicker go-to-market outcomes.
Understands the supplier landscape including their strategic and technological direction,
and is well-positioned to leverage the latest supplier innovations.
Brings multi-sector expertise, greater buying power and multi-industry exposure.
Implements a global operational platform and processes to consistently meet
delivery requirements.
Sets clear expectations for the supply base to ensure acceptable standards of quality
and reliability.
Embraces a data-driven approach that enables meaningful analytics around key
performance metrics and inventory, leading to more informed decision making.
11THE STATE OF AEROSPACE AND DEFENSE 2020
More important than ever to OEMs, is the ability to be nimble and invest in innovations that fuel the bottom
line and accelerate growth.
This is where licensing a product to a trusted partner can be a win-win situation.
MAINTAINING LEGACY SYSTEMS AND PRODUCT CONTINUITY
Key Considerations for Product Licensing
PRODUCT VOLUMES
declining or TECHNOLOGY
being phased out?
RESOURCES and CAPITAL TIED UP
in maintaining mature systems that need to
stay in service?
PRODUCT LINES being rationalized
as a result of a merger or
acquisition?
MANUFACTURING PROCESSES and
SERVICE AGREEMENTS aligned to meet cost, quality and efficiency goals?
Product Licensing is a bold move that enables OEMs to focus on their core - new product evolution and
development - while providing a strong customer service model for older products.
Financial: Licensing can facilitate the management of older product lines, particularly following a
merger. When Company A acquires Company B, it does not want to force Company B’s customers
to switch to Company A’s products. Licensing Company B’s products satisfies customers and
creates new revenue streams for the newly combined company. It also minimizes product support
costs for legacy products, provides ongoing, experienced customer support for mature product
lines, and funds future R&D.
Strategic: OEMs need to devote their R&D resources and personnel to developing new
technologies. Part of this process involves assessing whether a product or product line is still
core to their overall strategy. That said, it’s imperative to continue serving customers who rely on
older products with decades-long lifecycles. This presents a Catch 22: an OEM typically doesn’t
have the resources (i.e., cash, working capital, armies of engineers) to develop new products and
continue meeting customers’ high expectations for the service and support of older products.
In summary, as OEMs prepare for a successful 2020, we recommend the following key considerations:
EXTEND INNOVATION
Apply a DESIGN FOR EXCELLENCE
(DFx) Approach
Create a More RESILIENT
SUPPLY CHAIN
Implement new business models with
TRUSTED PARTNERS
Evaluate the entire set
of engineering and
design capabilities
and re-focus on
core strengths while
maximizing innovation
capabilities with
external resources –
bringing new solutions
to customers faster.
Embrace a full
product lifecycle
mindset to ensure
a fully-optimized
product by closely
monitoring costs
and vetting designs
for manufacturability
and long-term
sustainability.
Get ahead of
pending materials
shortages and
other global
business challenges
by creating
an integrated
ecosystem that
fosters greater
collaboration
between suppliers
and partners.
Evaluate partners
who can maintain
a product’s quality
and reliability for
the customer and
allow for an OEM to
re-allocate design
and manufacturing
resources – bringing
new innovations in the
pipeline to market.
ACCELERATE YOUR COMPETITIVE ADVANTAGE IN 2020 AND BEYOND
A Strategic Partner in the Transforming A&D Market
For more than two decades, Celestica has been a trusted partner to leading OEMs by helping them improve
their competitiveness and drive innovation in the design, engineering, manufacturing and after-sales support
of components, sub-systems and systems used in mission-critical applications.
1 “ Massive Raytheon/UTC Deal Highlights Q2 2019 M&A Activity — What Happens Now?” August 7, 2019, http://usblogs.pwc.com/industrialinsights/2019/08/07/massive-raytheon-utc-deal-highlights-q2-2019-ma-activity-what-happens-now/
2 “ Boeing Forecasts $8.7 Trillion Aerospace and Defense Market through 2028,” June 17, 2019, https://boeing.mediaroom.com/2019-06-17-Boeing-Forecasts-8-7-Trillion-Aerospace-and-Defense-Market-through-2028
3 “ Roblin, Sebastian, “Don’t Just Call Them ‘Drones’: A Guide To Military Unmanned Systems On Air, Land And Sea”, Forbes, Sept. 30, 2019: https://www.forbes.com/sites/sebastienroblin/2019/09/30/dont-just-call-them-drones-a-laypersons-guide-to-military-unmanned-systems-on-air-land-and-sea/#4649514e2b00
4 “ Wolfe, Daniel, “The global shortage of capacitors impacts all consumer electronics” Quartz, March 21, 2019 https://qz.com/1575735/a-mlcc-shortage-is-stifling-electronics-hardware-auto-makers/
5 “ Tsang, Amie, “U.S. Proposes New Taris on $4 Billion of E.U. Goods as Trade Dispute Grow”, The New York Times, July 2, 2019: https://www.nytimes.com/2019/07/02/business/us-eu-tariffs.html
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