Executives thinking holistically about long-term growth opportunities/reshaping portfolios.
The future looks promising for the Global Aerospace & Defense (A&D) industry. Close to two-thirds of senior executives responding to KPMG International’s latest Global A&D Outlook say they are confident or very confident in their company’s growth prospects over the next 2 years. Aircraft OEMs and major Defense contractors seem particularly confident in their growth strategy with 100 percent of the respondents from larger organizations (those with global annual revenues of more than USD10 billion) voicing confidence in their growth prospects.
According to the survey of 76 senior A&D executives from around the world, 41 percent now say growth will be an extremely high priority over the next 2 years. This is up from just 13 percent last year.
That being said, KPMG’s Global A&D Outlook survey also clearly indicates that cost and performance management are still high on the agenda for A&D organizations (81 percent are focused on improving cost and performance management). This suggests that many organizations are placing growth-oriented bets on new technologies and services while emphasizing cost reduction and consolidation in their slower-growth or declining segments.
Doug Gates, KPMG International Global Chair, Industrial Manufacturing and Global Lead, A&D, comments:
“A&D organizations will need to think about how they drive profitable growth in new segments while simultaneously managing costs within slower-growth segments. Executives are going to need to stretch their organizations outside of their comfort zone to explore new approaches and team up with new partners that can help to rapidly and cost-effectively exploit these emerging opportunities.”
Shaping the portfolio
As A&D organizations prepare to take advantage of new and emerging opportunities, the KPMG Global A&D Outlook suggests that executives are exploring a wide variety of strategies and options to drive growth. Eighty-seven percent of respondents say they plan to change the range of products they offer over the next 2 years; 91 percent say they plan to change the range of services that they offer.
Of those respondents that say they are planning to make changes to their product portfolio, almost half (47 percent) say they will make significant investments to launch one or more new products.
Accordingly, KPMG’s Global A&D Outlook reports that organizations expect to significantly ramp up investment into R&D. Indeed, whereas 30 percent of respondents say they spent 6 percent or more of revenues on R&D last year, 45 percent now say they will spend at least that amount over the next 2 years. More impressive still is the fact that one-in-five respondents say they will spend more than 10 percent of revenues on R&D over the next 2 years. Compare that to 2014 when no respondents indicated an anticipated R&D spend rate in excess of 10 percent.
With economies remaining sluggish and defense budgets flat in the mature markets, many A&D organizations are now looking to new foreign markets to generate new revenue. In fact, more than 9 in 10 of the A&D respondents say they plan to expand into new geographic markets over the next 2 years.
Aside from the quest for revenue growth, lower manufacturing costs are a major driver behind their non-domestic investments for half of the respondents. Additionally almost three-in-ten say that their foreign investment strategies are driven primarily by their desire to move closer to customers and to gain access to new markets.
A&D organizations based in North America were the most likely to say they are using their foreign investment to gain access to new markets. Respondents from India and China, on the other hand, were among the most likely to say they are looking for reduced manufacturing costs from their foreign investments.
Two-thirds of non-US based respondents say they will make investments into the US and Canada. Sixty-six percent of US-based respondents say they will invest into India and 50 percent say they will invest into mature ASPAC (including Japan, South Korea, Australia and Singapore).
Tom Mayor, National Service Group Leader, Industrial Manufacturing Strategy, KPMG in the US comments:
“A&D organizations are continuing to move manufacturing operations to the emerging markets – just think of Boeing and Airbus who have both recently opened final assembly lines in China – but as they do so, they are also thinking about how these investments help them better serve and attract the high growth regional markets. Moving from a ‘make in’ to a ‘sell to’ strategy for an emerging market requires a very different approach.”
Supply chain risks and innovation
Given the shift towards new products and new geographic markets, the KPMG A&D Outlook shows that supply chain failure continues to be viewed as a major risk for A&D organizations with 87 percent of respondents citing this as a major threat to achieving their growth agenda. Supply chain risk was ranked as the second greatest risk facing A&D manufacturers behind only concerns about the threat of another economic downturn.
However, less than one-in-ten reports they have visibility down into their Tier 2 suppliers. Only around half of the respondents are able to claim that they have ‘enhanced visibility’ into their Tier 1 suppliers and some Tier 2 suppliers.
As Erich L. Gampenrieder, KPMG’s Global Head of Operations Advisory noted in the 2016 Global Manufacturing Outlook, “The best way to reduce the risk of supply chain failure is by achieving greater visibility, and managing it cross-functionally deeper into the end-to-end supply chain.”
While improved visibility will be key, A&D organizations are taking many steps to improve their supply chain’s flexibility and responsiveness. Almost two-thirds (64 percent) of A&D respondents say they have plans to invest into demand sensing to improve their supply chain operations. And 60 percent say they will invest into supply chain analytics.
The rapid adoption of sensors and Internet of Things (IoT) technology is capturing significant attention and investment from supply chain leaders. Almost a third (32 percent) of respondents said they would defiantly be investing into IoT technologies for their supply chain. And an almost equal number said they would be prioritizing data and analytics capabilities in order to support their evolving supply chain.
“A&D organizations are seeing massive opportunity that can be achieved – and value that can be delivered – by connecting their products and improving their value through IoT, sensors and new business models enabled by data and analytics,” adds Doug Gates. “The more advanced organizations are thinking about how they combine data from their sensors with external data sources to create even more value for their customers and more sustainable growth opportunities for themselves.”
This report is based on a survey of 76 senior A&D executives conducted in early 2016 by Forbes Insights. Around half of our respondents are based in Europe and 21 percent are based in the Americas. Almost one third of our respondents represent companies with annual global revenues of more than USD5 billion and 8 percent represent organizations with revenues of more than USD25 billion.
To support the survey data, KPMG International conducted a series of interviews with leading A&D manufacturers around the world. Their experiences, combined with insights from KPMG professionals around the world, provide valuable context for today’s manufacturers.
The full A&D Outlook can be downloaded here.
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The views and opinions expressed herein are the personal opinions of the interviewees and authors based on their personal experience working as Auditors in the industry and do not necessarily represent the views or opinions of KPMG International or any KPMG member firm.
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