Aerospace Defense Outlook 2013

2013 Global
Aerospace&Defense
Outlook
2013 KPMG International Cooperative (KPMG International). KPMG International provides no client services and is a Swiss entity with which the independent member rms of the KPMG network are afliated.
About the survey
This Global Aerospace and Defense Outlook is part of KPMGs 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 KPMGs 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 reected in this Global Aerospace
and Defense Outlook include those from 14 large OEMs (large OEMs), dened as
companies with revenues of US$10 billion or more, and 43 medium-sized organizations
(suppliers), dened as companies with revenues of between US$500 million and
US$10 billion.
Forty percent of the A&D respondents identied 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.
These have not been easy times for the aerospace and defense (A&D) 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.
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 exit
unprotable 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 reecting the views of the vast majority of the sectors large OEMs
and suppliers from around the world dives into the challenges and explores the
opportunities present in todays 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, Iencourage
you to contact your local KPMG member rm or one of the contacts listedat the back of
this publication.
Foreword
Doug Gates
Global 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
Continued
emphasis
on managing costs
A&D executives around the world are
heavily focused on reducing their cost
base. And rightfully so: with almost
80 percent of large OEM respondents
saying 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.
Its 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 unprotable 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 growth 0.1 to 1.9%
growth
All A&D respondents Large A&D OEMs
2-3% growth Over 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&D
respondents said
that reducing their
cost structure
would be their top
strategic priority
for the next
2years.
2
|
2013 Global Aerospace & Defense Outlook
A&D companies exiting unprotable or non-core
product lines and businesses
Sharing functions
and/or facilities
with other
organizations
Acquiring
suppliers to
stabilize
input costs
Exiting
unprotable
or non-core
business units
Exiting
unprotable
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, the
wider 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
protable than before. Further
consolidation, for example, should lead
to 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.
|
3
Generally speaking, Brazils A&D sector
is inuenced 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 (Brazils
main passenger airport), Viracopos in Campinas
(Brazils 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 nd entering the market
to be a challenge without the benet 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 nd that many of the
opportunities for cost reduction that are already
commonplace in many other manufacturing
sectors shared services, collaborative supply
chain 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 signicant.
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 governance
models 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 tter 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
4
|
all. This is a particular challenge for the
sectors 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 of
their 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 nds
that of the A&D respondents
representing sector suppliers four in
ten said that their organizations goal
in pursuing transactions was to reduce
exposure to input price volatility and
dependence on third party suppliers.
The A&D sector
will need to place
a much higher
focus on improving
supply chain
integration.
Renewed focus
on the supply chain
If 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 supply
chain 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
Signicantly 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.
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5
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 signicant
challenges in aligning operations to real-
time uctuations in customer demand
while a quarter point to problems with
ensuring sufcient supplier capacity to
meet existing demand.
0%
10%
20%
30%
40%
50%
60%
Signicant challenges in aligning operations to real-time
uctuations in customer demand
26%
21%
Ensuring
sufcient
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
uctuations
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%
Inefcient
supply
chain tax
structure
Q: What are the top challenges facing your supply chain? Please select top two.
6
|
Becoming truly demand-driven
As A&D organizations look to become
leaner and more cost efcient, a
growing number are starting to move
towardsdemand-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 for
at 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 tiers
of 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 benets 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
nd that demand-driven approaches
may allow A&D organizations to
leapfrog their competitors and sustain
a competitive differentiation for an
extended period of time.
KPMG Insight
Rob Barrett
Managing
Director,
Advisory,
KPMG in
the US
Amit Gupta
Partner,
Advisory/
Management
Consulting,
KPMG in
the US
|
7
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 services
rather 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 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.
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
(23percent) of respondents from the
A&D sector and 44 percent of large
A&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 owing 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 in
new 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 markets
Expect to see
an increase in
the number of
partnerships and
joint ventures
being developed.
8
|
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 much
needed reforms.
However, some challenges remain for
foreign participants. For one, current FDI
limits (26 percent in India
1
) 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 organizations goals in pursuing transactions? Please select one.
1
http://www.livemint.com/Companies/oFSyiqFgw6SV4WXzohMyrK/India-to-stick-with-26-FDI-in-defence.html?facet=print
2
http://www.livemint.com/Home-Page/qOsh8IhMjSkHB9DNnlg8cP/Defence-procurement-policy-overhauled.html
|
9
Conclusion
As this Global A&D Outlook illustrates, todays global marketplace represents
a 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 customer
demands.
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 todays 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 these
new opportunities and explore new avenues for growth. Those that do not (or
cannot) will ultimately nd the next few years to be very trying indeed.
10
|
How KPMG can help
As a leading professional services rm 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-specic 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
thats tailored to each clients situation and needs.
KPMGs Audit, Tax and Advisory professionals support aerospace and defense
clients with deep technical and industry experience, and provide actionable
operational, nancial, and regulatory insights that help you cut through complexity.
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11
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--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.
Designed by Evalueserve. Publication name: 2013 Global Aerospace & Defense Outlook
Publication number: 130278. Publication date: June 2013
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Global Aerospace and Defense Leadership:
Additional contributors and country leaders:
Jeff Dobbs
Global Sector Chair,
Diversied Industrials
+1 313 2303 460
jdobbs@kpmg.com
Doug Gates
Global Head of
Aerospace & Defense
+1 404 222 3609
dkgates@kpmg.com
Kai C. Andrejewski
Aerospace and Defense Sector
Leader
KPMG in Germany
+49 211 475 7900
kandrejewski@kpmg.com
Glynn Bellamy
Partner
KPMG in the UK
+44 121 6096170
glynn.bellamy@kpmg.co.uk
Luis Alejandro Bravo
Leader
KPMG in Mexico
+52 555 2468360
labravo@kpmg.com.mx
Ken Drover
Lead Partner, Defense Center of
Excellence
KPMG in Australia
+613 92 88 6623
kdrover@kpmg.com.au
Jarib Fogaa
Leader
KPMG in Brazil
+55 19 2129-8700
jfogaca@kpmg.com.br
Jean-Luc Guitera
Partner, Aerospace and Defense
sector
KPMG in France
+33 155 686962
jguitera@kpmg.fr
Andrew Jackson
Partner
KPMG in the UK
+44 20 76941923
atp.jackson@kpmg.co.uk
Ja Young Jo
Leader
KPMG in Korea
+82 2 2112 0640
jjo@kr.kpmg.com
Neelu Khatri
Head of Aerospace & Defense
KPMG in India
+91 124 3074000
neelukhatri@kpmg.com
Grant McDonald
National Sector Leader, Aerospace &
Defense
KPMG in Canada
+1 613 212-3613
gmcdonald@kpmg.ca
Marty Phillips
Global Head of Management
Consulting for Diversied Industrials
+1 678 525 8422
mwphillips@kpmg.com
Laurent Des Places
Partner, Aerospace and Defense
sector
KPMG in France
+33 155 686877
ldesplaces@kpmg.fr
Alex Shum
Head of Diversied Industrials
KPMG in China
+86 212 2122508
alex.shum@kpmg.com
Michele Hendricks
Global Executive for Diversied
Industrials
KPMG in the US
+1 203 406 8071
mhhendricks@kpmg.com
Martha Collyer
Senior Marketing Manager
KPMG in Canada
+1 416 777 3505
mcollyer@kpmg.ca

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