Keep up – or die

The UK aerospace industry faces tough choices over which areas of
capability to let wither so others have a chance of survival, according to a
sobering new study. George Coupe reports.

Certain echelons of the aerospace industry must have given a deep collective gulp earlier this month, especially among the ‘lower tiers’. It was this sector that was presented with an ultimatum by the rest of the industry: keep up or die, said the report by the Society of British Aerospace Companies (SBAC).

The threat, while blunt, was also perfunctory to a degree, and reflects the irritation felt by industry leaders at those among the long-suffering supply chain who refuse to move with the times.

The SBAC has taken a long, hard look at the practice and extent of outsourcing to low-cost economies by the UK aerospace sector, and its conclusions are refreshingly frank.

There are some parts of the aerospace engineering business where the UK will never now be able to remain competitive, the report said.

For many companies this was not a warning, but a death sentence. The report said the industry must decide which of its limbs are allowed to wither and which must be fostered into long-term profit.

A lot of work has been put in to the supply chain to make it competitive but there are great parts of it that have failed to respond, and have now been overtaken.

As the SBAC report says, low-cost countries are actively pursuing UK business and are winning work from prime and first-tier companies, and even more work is set to go overseas.

‘This trend is not a passing fad. Our study has identified that the OEMs and tier-one companies, having proved the ability of their low-cost sources to provide both low and hi-tech products and services – brawn and brains – are about to increase their work placed in low-cost countries such as the Czech Republic, India and China.’

People who worry about this trend generally advise that the UK should carve a refuge in the hi-tech sector – with our superior intellectual stock we should be able to maintain some kind of leading market position. However, even this niche is being squeezed.

According to the report, the low-cost economies are increasing their investment in improving their technical competence.

While the weakness of the US dollar, to which many of the low-cost economies are linked, will lend a strong short-term advantage over the UK suppliers, it is in the long term that developing-world investment in new industries and training will tell.

The output of science and engineering graduates in places such as India is increasing, while the UK is experiencing a decline. This point does more than anything else to undermine the sense of security the UK might have in its capability for a leading, knowledge-based economy, innovation and new technology.

But this has all been said before – we all know the size and shape of the problem. What the SBAC report points out is that very few people among those who are likely to suffer the most are doing anything about it. Whole swathes of smaller companies have done nothing to secure their future or be more competitive.

‘So far UK tier-3 and 4 companies are not yet fully awake to the challenges and opportunities that low-cost countries present and few have appropriate strategies, or strategic sourcing programmes, of their own,’ it said. The SME purchasing survey carried out as part of the study suggests less than 10 per cent of UK aerospace SMEs are using low-cost sources.

‘Many companies are complacent about the dangers,’ said the report. Others are over-cautious and believe they lack the skills and resources to establish and manage suppliers in eastern Europe and Asia. ‘The main risk is these are cash-upfront transactions. Giving £50,000-£100,000 to a total stranger is worrying – China is a big place to disappear in,’ said one purchasing manager.

In addition to problems of the exchange rate and the swift progress made by the developing world, the odds are further stacked against the UK supply chain, thanks to its fragmented structure.

This complaint is often levelled by industry leaders at the lower tiers of UK aerospace; despite efforts to build aerospace ‘clusters’, fragmentation remains a fundamental weakness, which will make it more difficult for that part of the industry to respond to important changes in the market.

Overall, the report believes the failure of the lower tiers to outsource will result in a dramatic shakeout, with between 30 and 50 per cent of current players going to the wall, through bankruptcy or business failure, over the next 18 months to two years. If there is a falling-away at the bottom, the report is also plain in its analysis of how global rationalisation among prime contractors is likely to create further problems.

‘Political events are threatening to hijack the military aerospace procurement agenda and nothing is certain,’ it said. ‘Even sacred cows like Eurofighter are precariously poised. Globally sourced aerospace programmes look like being the way of the future, with the Boeing 7E7 and Joint Strike Fighter as prime role models.

‘Analysts see further industry rationalisation, and some forecast just two US primes, with potentially one European – leaving UK aerospace in a precarious position.’ The conclusion is that UK aerospace must rationalise, that is unify to concentrate its effort, a move that would inevitably leave many companies and areas of capability out in the cold.

‘Decisions must be made to establish which capabilities are invested in and which are left to wither. Further decisions are required to determine if, for the first time in UK history, it is the time to shed the ability to design, develop and build a combat aircraft from nose to tail.

If so, how would that impact the UK’s ability to meet current and future threats?’ The conclusions of the study are sobering; there will always be elements, such as services, that will remain a valuable method for boosting revenue, and the report recommends that the UK follow the US in developing its expertise in defence technologies such as network-centric warfare, precision weapons and unmanned air vehicles.

Although it is suggested that more is done to help SMEs take advantage of low-cost economies, the report calls for more research to be done on what shape the industry should take in the future. Then, most interestingly, when the ideal mix of technologies and capabilities has been identified, the report raises the idea of a programme to assist in restructuring ‘through the exit of uncompetitive companies’.

The chill tone should not be taken lightly. UK aerospace, caught between the US and European giants, and squeezed along the way by the technologically fast-breeder developing economies, could be in for a fight for its survival.