Roland Berger: aerospace and defense sector executives believe digitization is already affecting the industry heavily

• Digitization will impact the sector heavily in the next five years but just 5 percent of players are aware of the potential risks to their business model
• Top 3 on the CEO agenda: Manufacturing, product strategy and supply chain management
• Research & development (R&D) budgets remain high in spite of completed development programs – Tier 2 suppliers are investing strongly in innovation
• Around one third of firms anticipate slower growth in civil aviation in the next three to five years

MUNICH, 17-Jun-2016 — /EuropaWire/ — Top executives in the aerospace and defense sector (A&D) expect digitization to have a massive impact on their industry. 98 percent believe that digitization is already affecting the industry heavily or will do so in the next five years. However, just 31 percent of them anticipate a positive effect on future growth and profits. 51 percent of industry leaders, on the other hand, see the impact of digitization on bottom line efficiency only. These are some of the major findings of a survey of 200 of the industry’s top international managers from nearly 90 companies in 20 countries who were interviewed by Roland Berger for their “Aerospace & Defense Management Issues Radar 2016”.

“A large share of industry leaders seems to underestimate the risks that digitization poses for their value chains,” commented Manfred Hader, Head of Roland Berger’s Aerospace and Defense Practice. “Our experience from other industries suggests that digitization affects customer needs, for instance solutions become possible that were unheard of before. Therefore, we explicitly encourage leaders to scrutinize their whole value chain for disruption opportunities radically instead of focusing on pure efficiency improvement.”

Manufacturing is the top operational concern within the A&D industry
For the next 12 months, production is top priority for aircraft manufacturers and suppliers active in the civil aviation market. This is because the strong demand, emanating from Asia in particular, poses major challenges for the sector: If production is not to come to a standstill, capacities need to be ramped up and suppliers will have to deliver on time. “Otherwise there will be delays once more,” said Hader. The reason lies not least in the increasingly diverse range of products on offer in areas like interior fittings or engines. “Aircraft are being fitted out in an increasingly individual manner to meet the diverging needs of the airlines. But what this also means is that suppliers need to be more flexible and they need to be faster. Greater digitization in manufacturing would help them achieve that.”

Production management also tops the list of priorities in the defense sector, given growing defense budgets in Europe in particular, which are augmenting demand. “The defense sector is rather optimistic. Expectations vary by region, but the vast majority of industry leaders see defense spending returning to growth due to persisting geopolitical tensions,” explained Massi Begous, Partner at Roland Berger. Almost 90 percent of industry executives expect defense budgets to rise or remain unchanged. So it is no surprise that supply chain management again ranks as one of the top 3 priorities for the CEO agenda in this year’s study. “What was interesting for us was that product strategy had become more important within the industry, now ranking as the second most pressing issue,” added Begous. “This finding ties in with the increases in defense budgets and the way in which defense companies are developing new products to capture a share of these increasing budgets, but also the rise in projects around variants of commercial aircraft.”

Budgets for research and development continue to rise
Overall, R&D spending as a proportion of revenues is expected to be sustained at current levels for the next three years; given increasing production rates in both civil and defense sectors, this implies an increase in the absolute amount of R&D spending. “From our perspective, this is one of the most remarkable results of the survey – given that the major new programs in the civil sector are well past the peak of development spending, and that no major new defense programs have been launched, we would have expected to see a decline in R&D spending,” said Robert Thomson, Partner at Roland Berger. Now, 30 percent of the surveyed firms are spending between 2 and 4 percent of their revenues on R&D on average, whereas it was just 28 percent of firms three years ago.

Previously, any special features were restricted to structural elements or interior fittings. Nowadays, OEMs are more cost sensitive and demand cheaper alternatives with short lead times and flexible application possibilities. Innovations are therefore ever more important, but the industry is struggling to break the mold in R&D, which is why OEMs prefer to shift the responsibility to suppliers. Tier 2 suppliers, in particular, have increased their R&D investments on a massive scale in the last three years as a result: Almost 40 percent of the companies surveyed in the report are spending as much as 6 percent of revenues, as against just 26 percent that spent as much three years ago. “But we are not seeing OEMs reduce their R&D budgets, which means that overcapacities may result. In order to ward off that possibility, both OEMs and suppliers need to fundamentally reconsider their R&D strategy and their supply chain management,” advised Thomson.

Growth in the civil market is slowing
Overall, the civil sector has adopted a more guarded perspective with respect to the future than was the case last year. 31 percent of the surveyed executives anticipate growth leveling off in the next three to five years. This proportion, up from 27% last year, may indicate that sentiment in the industry is changing and that the sector may be reaching a turning point. That said, production capacities are still being expanded by OEMs keen to guarantee their ability to meet delivery deadlines, according to one third of study respondents. And suppliers really need to do the same. “Aircraft manufacturers therefore ought to be more proactive and more transparent in their communications with suppliers if they want to avoid future imbalance in the supply chain,” said Manfred Hader in conclusion.

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