hz study internationalisationaerosuppliers

Der unterschätzte Chief Operating Officer

Internationalization and Competitiveness of

AerospaceSuppliers

Aerospace and Defense

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03Internationalization and Competitiveness of Aerospace Suppliers

Preface

Ladies and Gentlemen,

Increasing globalization is intensifying the pressure placed on the aerospace industry supply chain.

Today, most of the suppliers in Europe are on Tier-2 and -3 level for new aircraft and helicopter programs. Tier-1 is increasingly occupied by large, international, usually multi-system equip-ment suppliers. These corporations increase the competitive pressure on SMEs (small and medium-sized enterprises); on the other hand, they are new customers for these suppliers. Likewise, the production ramp-ups for the A350, A320neo, and B737MAX programs make considerable industrial and personnel demands on the supply chain.

In the long term, SMEs can only become suppliers with attractive work packages in future international aircraft programs if they have the skills needed to do business internationally. They have to be able to offer the technology competence expected by OEMs and Tier-1 compa-nies in the form of own innovations, and they have to display commercial capabilities such as accepting risk sharing partnerships as well as management of sub-suppliers. To what extent aerospace suppliers already have this competence is investigated for the first time in this study on the basis of an exhaustive criteria set on a broad database.

It is my hope that the results of the study would lead to a further intensification of the discus-sion between OEMs, Tier-1 companies, and suppliers as to what specific measures are to be introduced to further improve the competitiveness of the aerospace supply industry.

Arndt Schoenemann

Vice President Equipment and MaterialsGerman Aerospace Industries Association

04 Internationalization and Competitiveness of Aerospace Suppliers

PATr

On

AGE

SuPP

Or

TEr

S

Germany Europe

EditorialIn the past years, due to the aerospace industry’s progressing globalization, the international-ization capability of the supply chain, especially at levels below Tier-1 companies, has become increasingly important to keep program supply chains running smoothly as well as to avoid costly budget overruns and schedule delays. Although strengths and weaknesses of suppliers are widely discussed, so far no systematic analysis has been performed that is based on a broad sample of companies, integrating both the supplier and customer view, and assesses the role of support organizations like associations or trade development agencies in the inter-nationalization process of suppliers.

The study was initiated by ISC, the International Suppliers Center at ILA Berlin Air Show, and the business consultancy h&z. The motivation behind this initiative was to contribute to the ongoing discussion a systematic analysis of the internationalization capability of suppliers and to find starting points for improvement measures. In addition to BDLI, further aerospace associations and clusters across Germany and Europe actively supported our study. As a result, 135 aerospace supplier companies took part in a detailed online survey and voiced their perceptions of their company’s internationalization capability. We conducted interviews with 12 aerospace OEMs and Tier-1 suppliers to identify the expectations they have as cus-tomers.

The study team would like to thank all participants for their valuable contributions.The study brochure contains an excerpt of the extensive data and interview material we collected. In case you have further questions, please let us know.

Michael Santo Jochen Schmid


Contents

06Global aerospace supply chains need transformation

12Where is the aerospace supplier industry today?

18Size does not always matter – future competitiveness portfolio

22Role of support organizations

28Recommendations to stakeholder groups

34 Conclusions

35Methodology, online survey participants, interview partners

Global aerospace supply chains need transformation


The aerospace industry has always been an international industry. However, up to the begin-ning of the 21st century, aircraft OEMs were vertically integrated companies. They conducted most parts of engineering and manufacturing in-house and sourced – with the exception of very complex systems, such as aero-engines – primarily from small suppliers within their home markets. Over the past 15 years, with each new program, the way of aircraft engineer-ing and manufacturing has been gradually transforming. There are various reasons for this:

New technologies: They are needed to increase fuel efficiency and reach environmental tar-gets. Maturing new technologies, e.g. advanced materials, software, and electronics, request considerable investments in r&D, manufacturing machinery, processes, and employee skills. OEMs would like to share these costs with suppliers who provide special technical know-how, industrial efficiency, and a strong financial backbone.

Rising importance of BRIC countries: Market success of aircraft programs is increas-ingly determined by sales in BrIC countries, especially in Asia, a key future air traffic growth region for the next 30 years. To sell large numbers of aircraft there, localized value creation is essential.

Shrinking military budgets: In the past, military programs contributed significantly to the financing of civil r&D. Today there are only very few military programs in sight. Less “co-financing” from military programs is the result. This increases the need to cut costs.

Delays and budget overruns: All current programs in Europe, north America, and China are late and over budget. This reduces available cash in the industry, needed to make the ramp-up of volume programs like A320neo and B737MAX possible.

The starting point of our study is the required transformation of the aerospace industry.

08 Internationalization and Competitiveness of Aerospace Suppliers

new technologies requiring high investments in r&D, equipment, and skills

rising importance of BrIC countries as key future air traffic regions and locations to create value

Shrinking national military budgets reduce co-financing of technologies for civil use

Financing challenges due to delayed programs and manufacturing ramp- ups of current programs

Required transformation of supply chains

KEy InDuSTry DrIVErS

OEM Tier-3 to Tier-ncomponents & parts

Tier-2 modules

Tier-1 systems

OEM


As a consequence, aircraft supply chains and the roles of OEMs and suppliers are changing. As persistent program delays suggest, all companies involved are still in a learning curve. OEMs focus on large system integration and the interface to the customer. To reduce their financial burden and technical risks they outsource a considerable share of design and build work packages to large international Tier-1 suppliers. At the same time western OEMs set up engineering, manufacturing, and MrO (maintenance, repair, and overhaul) operations within the dollar zone to reduce exchange rate risks and within growth regions to facilitate market access. Global sourcing of OEMs has the same objectives. Tier-1 suppliers follow suit, also shifting more responsibilities upstream to their suppliers and sourcing globally.

To remain in the supply chains of existing customers and to win new customers among Tier-1 companies worldwide upstream suppliers have to develop and prove their international competitiveness.

Internationalization and Competitiveness of Aerospace Suppliers10

22 CrITErIA OF InTErnATIOnAL COMPETITIVEnESS

• Risk Management• IP Protection• Legal Experience• Financing Experience• Receivables Management• Currency Management• Language Skills (English)• HR Capacity Management

• Competitor and Market Intelligence• Tender Experience• Aerospace Audit Experience• Export/Import Experience• Operations Experience Abroad• Balanced Customer Portfolio

Customer& Market

Access

Product/ Service Offer

International Competitive-

nessEnabler

Processes& Skills

• Technology or Process Advantage• Technology Co-development• Flexibility• Offshore/Offset• Supply Chain Management• Quality Management Certifications• Risk Sharing• Pricing

Customer & Market AccessWe ask our suppliers for operations and sourcing in growth regions. We ask: Do you know the local supply chain in these countries, are you ready to source or invest there?VP Global Sourcing, OEM

The criteria set focuses on the capabilities of suppliers to retain existing (national) cus-tomers and win new customers abroad. Customers expect suppliers to be well-informed about market trends, to be able to run tenders professionally, and to have aerospace audit experience. A supplier has to know its own country’s export regulations and the

“ ”

How do aerospace suppliers become internationally competitive?

In cooperation with industry experts we defined a set of 22 criteria to assess the internation-alization capability of aerospace suppliers.

Internationalization and Competitiveness of Aerospace Suppliers 11

Product/Service OfferIt is more important for a supplier to be specialized than big. In the future we will primar-ily source from suppliers that help us to differentiate our own technology. If a supplier only offers commodities he has to be globally competitive from a price point of view. VP Strategic Procurement, OEM

The criteria set focuses on the core products/services and value-added services of an aerospace supplier. Customers increasingly expect suppliers to contribute to their prod-uct differentiation. Technology co-development, flexibility in customer service, and quality management certifications (e.g. En 9100, EASA Part 21 G) are other important criteria. Increasingly, risk and revenue sharing partnerships, the management of sub-suppliers, and the ability to provide offshore content or take over the customer’s offset obligations are sought after. The price issue is gaining in importance.

Enabler Processes & SkillsIn our industry, it is not just about technology development anymore, it is about industri-alization. you can see from the professionalism of project and risk management whether a supplier is a good supplier. VP Procurement, Tier-1 supplier

The criteria set focuses on internal management processes and skills relevant for inter-nationalization. Increasingly, customers expect suppliers to have a professional risk management (identification, monitoring, and mitigation of economic and technical risks), IP protection by contractual agreements, as well as an understanding of the contents of increasingly complex contracts, also of foreign customers. In addition to that, suppliers should be experienced in a range of financing instruments and dollar hedging. And quali-fied staff proficient in English is a requirement for processing international orders.

import regulations of target countries as well as the rules for uS export. A certain experi-ence in manufacturing operations abroad is also desired. Additionally, the supplier is expected to have a balanced customer portfolio with each customer not contributing more than one third of revenue.

“ ”

“ ”


Where is the aerospace supplier industry today?

To find out where the aerospace supplier industry stands today, we conducted an online sup-plier survey. In total, 135 aerospace suppliers from Germany and Europe completed and sub-mitted an online questionnaire. Based on the responses a profile of strengths and weakness-es was created. This served as the basis for interviews with the “customer side”: CEOs, CPOs, and other senior procurement managers of 12 OEMs and Tier-1 companies. From the inter-views, an average customer expectation score was calculated per criterion. The average cus-tomer expectation scores were taken as 100% (“red line”) and the supplier scores per criteri-on were adjusted accordingly to see where suppliers are above or below customer expectations. We split the sample in two parts: large suppliers exceeding €50 m in revenues p.a. and SME1 suppliers.

1 EU definition SME: small and medium-sized enterprises; ≤ €50 m of revenue p.a., ≤ 250 employees, balance sheet total ≤ €43 m


Large suppliers roughly meet Customer & Market Access criteria, with the exception of set-ting up operations abroad. Regarding their Product/Service Offer they show strengths in tech-nology co-development and customer service, and some weaknesses in offshore/offset capa-bility as well as supply chain management. When it comes to Enabler Processes & Skills, large suppliers demonstrate strengths in legal experience and intellectual property protec-tion, and severe weaknesses in risk management and financing.

THE STrEnGTHS AnD WEAKnESSES PrOFILE OF LArGE SuPPLIErS

CuSTOMEr & MArKET

ACCESS

PROduCT/SErVICE OFFEr

EnABLErPrOCESSES& SKILLS

QM Certifications

Tender Experience

Aerospace Audit Experience

Export/Import Experience

Hr Capacities

English

receivables Management

Currency Hedging

Financing Experience

Legal Experience

risk Management

Pricingrisk Sharing

Intellectual Property Protection

Supply Chain Management

Flexibility

Offshore/Offset Capabillity

Technology Advantage (Product & Process)

Customer Portfolio

Technology Co-development

Operations Experience Abroad

Competitor and Market Intelligence

Large suppliers (n = 29) Customer expectations = 100%

100

75

50

25

0


LArGE SuPPLIErS’ rESuLTS In DETAIL, n = 29

CuStOMER ExPECtAtIONS

Assessment criteria 0 50 100 150% < > below above

% of comp. below

% of comp. above

Further description of sample


48% 52% Companies are regularly in touch with their customers’ technical (86%) and procurement (76%) departments

Tender Experience 69% 31% Companies have a clear understanding of formal (93%) and informal (83%) criteria of customer tenders


24% 76% 65% of companies are audited by more than 3 OEMs


59% 41% Around 78% are experienced in national export processes/regulations, in uS export regulations, and customers’ provisions / import processes in target countries


86% 14% Only 56% have any experience in foreign direct investments, only 33% of par-ticipants set up a production facility abroad, less than 20% in BrIC countries

Customer Portfolio 45% 55% More than 60% of participants have a balanced customer portfolio, only 19% are dependent on one customer

85%

Answer range/spread Score ( χ∼ ) survey Customer expectations = 100% (average interview responses)



% of comp. below

% of comp. above



83% 17% 17% have unique technical selling points, 66% have less than ten competitors worldwide on the same technical level


59% 41% 55% of companies are involved in the conceptual and preliminary design phases of aircraft programs

Flexibility 69% 31% 30% regard their service offering as more comprehensive, 62% as comparable to main international competitors

Offshore/Offset Capability

66% 34% 41% of companies can offer offshore content, about 30% have experience in taking over offset obligations of their customers


69% 31% 63% of companies control all their upstream suppliers, 41% have an interface with their customers’ IT systems

QM Certifications 14% 86% 100% of companies have a QM certification, EN 9100 (90%), EASA Part 21 J (10%), EASA Part 21 G (34%)

risk Sharing 66% 34% Only 34% of companies can assume complete risk sharing packages

Pricing 52% 48% 52% of companies have prices in line with international competition

Product/Service Offer

88%



% of comp. below

% of comp. above


risk Management 97% 3% Only 38% of respondents consider their risk management to be systematic


52% 48% 62% of companies protect their IP via contractual agreements, only 24% have a systematic patent management

Legal Experience 48% 52% 52% consider themselves experienced in contractual agreements of western customers, 35% in agreements of non-western customers

Financing Experience 100% 0% Top 5 financing instruments: companies’ current cash flow (69%), customer prepayments (69%), bank financing (24%), cooperation with partners (24%)

Currency Hedging 86% 14% 55% of companies issue invoices also in euro, about 45% do currency hedging, 45% define rates within customer contracts

receivables Management 86% 14% 52% of companies do not insure their receivables, less than 15% sell their receivables, 28% use documentary letters of credits

English 21% 79% Almost 100% of companies consider their employeesto be proficient or highly proficient in English

Hr Capacities 3% 97% Domestically, it does not seem to be problematic to find qualified technical managers (10%) or engineers (14%), abroad there are some difficulties in find-ing engineers (35%) and technicians (48%)

Enabler Pro-cesses & Skills

87%

Customer & Market Access


THE STrEnGTHS AnD WEAKnESSES PrOFILE OF SMES

In comparison to large suppliers, SMEs are considerably weaker with regard to Customer & Market Access criteria. The Product/Service Offer results are very similar, except that SMEs show a weaker risk sharing capability. The profile of the Enabler Processes & Skills criteria set is again similar to the large suppliers, but SMEs display additional weaknesses in legal experience and intellectual property protection.

QM Certifications

Tender Experience



CuSTOMEr & MArKET

ACCESS



Hr Capacities

English


Currency Hedging


Legal Experience

risk Management

Pricingrisk Sharing



Flexibility



Customer Portfolio




SME suppliers (n = 106) Customer expectations = 100%

100

75

50

25

0


SME SuPPLIErS’ rESuLTS In DETAIL, n = 106



% of comp. below

% of comp. above



87% 13% Companies are regularly in touch with their customers’ technical (65%) and procurement (53%) departments

Tender Experience 91% 9% Companies have a clear understanding of formal and informal criteria of customer tenders (60%)


66% 34% 53% of companies are audited by 2–3 OEMs, 25% more than 3 OEMs


86% 14% 21% are experienced in national export processes/regulations, in uS export regulations, and customers’ provisions / import processes in target countries


98% 2% Only 15% have any experience in foreign direct investments, only 7% set up a production facility abroad

Customer Portfolio 57% 43% Only 43% of participants have a balanced customer portfolio, 30% are depen-dent on one customer

48 %



% of comp. below

% of comp. above



83% 17% 17% have unique technical selling points, 37% have less than ten competitors worldwide on the same technical level


74% 26% About 52% of companies are involved in the conceptual design phases of aircraft programs, 58% in preliminary design phases

Flexibility 80% 20% 64% perceive their service offering as comparable to their main international competitors


81% 19% 43% of companies cannot offer offshore content, 21% have experience in taking over offset obligations of their customers


82% 18% 41% of companies control all their upstream suppliers, 33% have an interface with their customers’ IT systems

QM Certifications 39% 61% 85% of companies have a QM certification, EN 9100 (61%), EASA Part 21 J (8%), EASA Part 21 G (20%), nadcap (9%)

risk Sharing 82% 18% 57% of companies are purely paid according to expenses, only 18% can assume complete risk sharing packages

Pricing 54% 46% 45% perceive their prices in line with international competitors’72 %

Product/ Service Offer

Answer range/spread Score ( χ∼ ) survey Customer expectations (average interview responses)



% of comp. below

% of comp. above


risk Management 99% 1% Only 24% have a systematic risk management


76% 24% 48% are exclusively build-to-print suppliers, 42% protect their IP via contractual agreements, only 20% by patents

Legal Experience 94% 6% Experienced in contractual agreements with domestic customers (14%), western customers (7%), non-western customers, e.g. russian, Chinese (4%)

Financing Experience 100% 0% Top 5 financing instruments: companies’ current cash flow (53%), customer pre-payments (45%), bank financing (32%), equity increases (18%), r&D grants (16%)

Currency Hedging 96% 4% 60% of companies issue invoices only in their national currency (e.g. euro), only 24% do currency hedging, 22% define rates within customer contracts


92% 8% 76% of companies do not insure their receivables, less than 9% sell their receivables, 8% use documentary letters of credits

English 31% 69% 96% consider their employees as proficient or highly proficient in English

Hr Capacities 15% 85% 37% of companies have problems in finding qualified technical managers, engineers (41%); for operations abroad it is difficult to find engineers (59%) and technicians (58%)66%

Enabler Pro-cesses & Skills

Customer & Market Access

Size does not always matter –future competitiveness portfolio


Why and how is the future competitiveness portfolio calculated?

As seen in the detailed descriptions of the sample, the scores per criterion are widespread.They show that small suppliers can surpass customer expectations while some large compa-nies do not even come close. To see how each individual supplier compares with othersuppliers and meets customer expectations at Enabler Processes & Skills and Product/ Service Offer criteria, we calculated a portfolio encompassing all 135 responding companies. The position of each supplier is based on the suppliers’ average score achieved across the Enabler Processes & Skills and Product/Service Offer criteria sets (16 criteria). Again supplier scores where adjusted by the average customer expectation score set at 100 % to see which companies are above or below customer expectations.

Company size is a weak indicator for competitiveness – also small suppliers exceed customer expectations across the 16 criteria.

1.0 equals customer expectations SME Large company

DEFINItION OF zONES

Future order winning zone: Suppli-ers roughly meet or exceed cus-tomer expectations. The zone starts at 90% of average customer expec-tation for the Product/Service Offer criteria set and at 80% for Enabler Processes & Skills.Future order qualifying zone: Sup-pliers meet some customer expec-tations and show development potential in other areas. The zone starts at 60% of average customer expectation for the Product/Service Offer criteria set and at 50% for Enabler Processes & Skills.Future exclusion zone: Suppliers are far from meeting customer expectations, i.e. below 60% of cus-tomer expectations regarding the Product/Service Offer criteria set and 50% regarding Enabler Pro-cesses & Skills.

Factor

Future exclusion zone

Future order qualifying zone

Future order winning zone

Factor

Product/Service Offer

0.00.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5

Enab

ler

Proc

esse

s &

Ski

lls 13%

58%

29%

FuTurE COMPETITIVEnESS POrTFOLIO (n = 135)


Company profiles in the three zones

FuTurE OrDEr WInnInG zOnE

FuTuRE ORdER QuALIFyINg zONE

Suppliers in this zone are primarily companies with a “Tier-1 profile” regarding technological complexity of their products. 41% of the companies are SMEs. On average, they meet custom-er expectations in terms of product-related services but also with enabler processes. They are very likely to win attractive global tenders in future and have already proven their global com-petitiveness. However, some weaknesses persist, primarily in risk management and financing experience.

CuSTOMEr & MArKET

ACCESS



QM Certifications

Tender Experience



Hr Capacities

English


Currency Hedging


Legal Experience

risk Management

Pricingrisk Sharing



Flexibility



Customer Portfolio




CuSTOMEr & MArKET

ACCESS



QM Certifications

Tender Experience



Hr Capacities

English


Currency Hedging


Legal Experience

risk Management

Pricingrisk Sharing



Flexibility



Customer Portfolio




Suppliers in future order winning zone (n = 17) Customer expectations = 100%

Suppliers in future order qualifying zone (n = 78) Customer expectations = 100%

100

75

50

25

0

100

75

50

25

0


FuTurE EXCLuSIOn zOnE

Nearly one third of aerospace suppliers are in the future exclusion zone. Although they currently have sufficient revenues and utilization rates they are likely to disappear from the aerospace market over the next 5–10 years.

This zone comprises the largest share of participating suppliers; 80% of them are SMEs. They have the potential to be considered in future global tenders, and already collected some export experience. On average, this group of companies offers attractive manufacturing and/or engineering processes, some of them in highly specialized niches (e.g. CFCs, high-temper-ature materials). Weaknesses in supply chain management, risk management, and financing limit their further international growth.

92.5% of suppliers in this zone are SMEs. They reveal considerable weaknesses in almost all criteria, except QM certifications, English skills, HR capacities, customer service, and pricing. They tend to be commodity suppliers, e.g. milling and drilling companies, with many interna-tional competitors, and thus they are prone to be replaced by low-cost suppliers from abroad. OEMs will force them to further industrialize or threaten to phase them out. They might be considered in less attractive, short-term contracts, primarily in the role of an extended work-bench to give the OEM/Tier-1 “breathing space” when ramping up production.

CuSTOMEr & MArKET

ACCESS



QM Certifications

Tender Experience



Hr Capacities

English


Currency Hedging


Legal Experience

risk Management

Pricingrisk Sharing



Flexibility


Technology Advantage (Product & Process

Customer Portfolio




Suppliers in future exclusion zone (n = 40) Customer expectations = 100%

100

75

50

25

0

Role of support organizations


Which organizations such as associations or government authorities currently support aerospace suppliers in their internationalization?

A number of organizations support aerospace suppliers in their internationalization process. The most typical organization types and some of their most common services are shown in the illustration. In our survey the participants were asked to choose from a portfolio of 11 ser-vices and indicate from which types of organizations they obtained which types of services. Typically they indicated usage of more than one service and of more than one support organi-zation.

Most frequently, aerospace suppliers turn to associations and clusters when they seek internationalization support.

national industry associations

National industry associations,

e.g. BDLI, GIFAS, ADS

Government authorities, e.g. embassies, consulates,

representative offices abroad

trade support agencies (national, regional), e.g. GTAI, Bayern International

*universities, research insti-tutes (not part of the study)

State banks “Förderbanken” (e.g. KfW, LfA)

Regional aerospace associations and clus-

ters, e.g. Aerospace Valley, Luftfahrt-

standort Hamburg

Chambers of commerce, e.g. WKÖ, IHKs, AHKs

TyPES OF SuPPOrT OrGAnIzATIOnS uSAGE OF SuPPOrT OrGAnIzATIOnS

Trade support agencies on a regional/state level

regional aerospace associations andclusters

Chambers of commerce

Trade support agencies on a national level

representative offices on a regional/state level

Embassies, consulates

272

GA

OEM

Tier-1

Tier-2

Tier-3 to Tier-n

TSA nA

rACCSB

ur

I*

250

189

178

114

98

59

Aircraft supply chain

n = 135 companies


How do suppliers perceive services of support organizations? In which areas do they wish for more support?

PErCEPTIOn OF nOn-FInAnCInG SErVICES OF SuPPOrT OrGAnIzATIOnS (n = 135)

More support wished by % of respondents

Collective stands at foreign fairs

Country and sector analyses

Delegation trips abroad

B2B events with potential foreigncustomersIndividual mediation of contacts to pot. foreign customersresponding to initial questions on legal issues abroadresponding to initial questions onexport/import/customs regulations

Delegation visits of pot. foreign customers to home country

Mediation of suitable service providers abroadTraining cooperations between domestic and foreign universitiesTraining cooperations between domestic and foreign vocational colleges

38 1

1

1

1

1

3

4

2

5

4

5

61

60

59

52

50

48

46

47

40

34

22

HelpfulNot utilizedUnhelpful

39

40

47

49

49

50

51

55

62

73

In %

In %

PErCEPTIOn OF FInAnCInG SErVICES OF SuPPOrT OrGAnIzATIOnS (n = 135)

Government r&D grants

61% of respondents wish for more support in project financing

Government low interest rate loans

Conditionally repayable loans at the national levelConditionally repayable loans at the regional/provincial/state level

Mezzanine capital (government venture capital) at the national level

Mezzanine capital (government venture capital) at the regional/provincial/state level

49 7 19 25

30

44

56

56

64

33

27

26

25

19

16

14

13

17

15

21

14

6

Offer reviewed and utilized

Offer reviewed, found to be suitable, but not utilized

Offer reviewed and found to be unsuitableOffer basics known

Offer unknown

2

2

0

0

0

0

0

0

33%

36%

44%

27%

17%

46%

30%

27%

19%

10%

9%


The individual organizations’ internationalization support services portfolios vary in breadth and depth. The services valued most by suppliers, in terms of usage and future support whishes, can be subsumed in three groups:

Project financing offers: Almost two thirds of suppliers (61%) wish for more support in financing, more than for any other service. While 3/4 of participants are familiar with govern-ment r&D grants, other types of financial support are barely known. As support organizations have standard financing programs and tend to communicate them openly, the answers indi-cate that state-backed financing offers may not be perceived as commercially attractive, e.g. when it comes to interest rates or administrative burden. They may also indicate that offers are not suitable for aerospace companies because they do not cater for their specific require-ments and conditions (e.g. very low production volumes, high investments, product life cycles > 30 years, dependence on a single customer for a program).

“Door opener contacts”: This sort of internationalization services belongs to the most popular among suppliers. Joint stands at trade fairs and B2B events are part of the standard range of services of many support organizations. In some cases they even mediate individual contacts to potential customer companies. At trade fairs and B2B events, suppliers can get in touch with relevant technology and procurement decision-makers. Interestingly, only half of the respondents considered international delegation trips as helpful, although these trips are frequently offered by support organizations. The other half has not even made use of this offer so far. A reason for that could be that typical delegation programs consist mainly of meetings with politicians or representatives of government authorities and associations. They are not geared towards getting in touch with decision-makers in potential customer companies.

Providing market information: The provision of advice on legal issues, export and import, customs regulations, as well as country and sector analysis are also highly valued by suppliers. From time to time these services may be offered for a specific project, but they are not part of support organizations’ standard programs, at least not for the special needs of the aerospace industry.

Some of the support services most valued by suppliers, such as project financing offers, are not geared towards the specific needs of aerospace suppliers.


At first glance services of support organizations cover major aspects of an aerospace suppliers’ internationalization process.

InTErnATIOnALIzATIOn BuSInESS PLAnnInG OF AErOSPACE SuPPLIErS

MARkEt AND CuStOMER ANAlySIS BuSINESS MODEl OPERAtIONAlIzAtION

– Analysis of overall country/market accessibility and attractiveness

– Target customers’ accessibility and attractiveness

– Identification and getting in touch

– Customer needs and key purchasing criteria

– Tender processes and decision- making

– Product/Service Offer: Technology, Customer Service, Offshore/Offset, QM Certificates, Risk Sharing, Pricing

– Enabler Processes & Skills: risk Management, IP Protection, Legal, receivables Management, Language Skills, Hr Capacities, Financing, Currency Hedging

– Market entry options: Export, sales offices, locating value creation abroad (manufacturing and/or engineering)

– Setup of operations– Supply chain management– Export and import regulations

and processes

– Project risk management

– receivables management– Legal and contractual issues

– Human resources capacities

Support services covered by support organizations

GA Government authorities SB State-backed banks RA Regional associations and clusters

NA National associations CC Chambers of commerce tSA Trade support agencies (national, regional)

Regular aerospace-specific support Non-industry-specific support

NA

tSA

RA

GA

GA

CC

SB

SB

tSA

tSA


The illustration shows the generic steps of international business planning of an aerospace supplier from market analysis via business modeling to operationalization. Those issues for which support organizations offer assistance are highlighted. At first glance the organizationscover many relevant aspects of supporting international business. As we have learned from the interviews with support organizations, most of them solely focus on assisting companies in getting “door opener contacts” (e.g. joint stands at trade fairs, delegations, B2B events), the initial steps of international business. Subsequent steps which are even more important are not covered to the same extent. In these fields chambers of commerce and banks provide certain coverage. However, they tend to lack specific knowledge of the aerospace industry, making their support limitedly usable for aerospace suppliers. There also seem to exist – apart from some notable exceptions on the regional level – only very few joint efforts of sup-port organizations, which increases the likelihood of parallel efforts and one-off initiatives.

Recommendations tostakeholder groups


Which efforts by the stakeholder groups have the biggest impact on the im-provement of international competitiveness?

Our analysis showed: most of the large suppliers already come close to customer expecta-tions whereas the majority of the SME suppliers have to close a substantial competence gap. SMEs make up more than 80% of aerospace suppliers and are indispensable for the success of future programs. They stand for a large fraction of key know-how needed to successfully design and build aircraft parts and components.

But customers do not only seek for technological niche know-how. They expect commercial management skills, also of their SME suppliers. Shifting responsibility for technology devel-opment, manufacturing, and financing to SMEs bears certain risks for the aerospace industry base. SMEs tend to be lacking management capacity and the financial backbone to fulfill these tasks. The low production volumes they can accomplish in technical niches do not allow for a real industrialization of processes which is needed to cut costs. SMEs usually perform their value creation in-house in Europe, but more and more (even domestic) customers pay in uS dollars. In many cases it is not possible for the SMEs to contract sub-suppliers in uS dollars or to outsource manufacturing operations abroad.

To make the system integration model in global supply chains work addi-tional skills and joint efforts by all levels of the supply chain are required. It will take OEMs, Tier-1 and lower-tier suppliers up to one decade and substantial investments to accomplish this. The process has to be acceler-ated and balanced to ensure that German and European suppliers keep attractive work shares in future programs.


AEROSPACE OEM/TIER-1• Strategic connection to the best• Focused supplier development• Increased transparency

SuPPOrT OrGAnIzATIOnS• Market access network• Accessible R&d schemes • Access to project financing

AErOSPACE SuPPLIErS• Strengthen risk and claim management• Strengthen technology differentiation

and sub-supplier management

Improving international competitiveness

rECOMMEnDATIOnS

1

2

3


Recommendations to OEMs / tier-1 suppliersStrategic connections to the best: The companies of the future order winning group will become the rising stars within the aerospace supplier market due to a very competitive mixture of products/services and mature support processes. Especially the SME suppliers in this area have to manage tremendous growth challenges as they are already identified as best in class by OEMs / Tier-1 suppliers. To ensure their future performance OEMs / Tier-1 com-panies should establish strong and strategic relationships with them to become “preferred customers”.

Focused supplier development: Most of the current supplier development activities are focusing on short-term performance improvement measures to keep delivery schedules. Many of the tackled suppliers are in the future exclusion zone. In addition to these firefighting actions (which are needed and useful), OEMs / Tier-1 companies should establish supplier develop-ment programs with a choice of suppliers from the future order qualifying zone. The perfor-mance of these suppliers is currently sufficient but they display weaknesses in some enabler processes, especially in risk and supply chain management. Joint projects will help to improve the supplier performance in these areas and will lift the suppliers into the future order winning zone.

Increased transparency: Many OEMs / Tier-1 companies share only a limited amount of program and technology knowledge with their suppliers. The information they provide is mainly focused on a subsystem level. Additionally, it tends to be too optimistic, so that suppliers’ business cases are bound to fail if they rely on it. Having made these experiences over the years, suppliers become very careful when using OEM/Tier-1 information as a valid planning base. This leads to a lack of consistent planning and transparency throughout the whole supply chain. Increased transparency will not eliminate this problem, but it has to be the starting point for future planning reliability and consistency.


Recommendations to suppliersIn the survey most of the suppliers indicated that their day-to-day business hardly leaves any time to pro-actively approach potential international customers. To make sure that the limited amounts of time and money for international sales efforts are invested effectively, suppliers should first work on strengthening those criteria which are relevant from a customer and bot-tom-line perspective:

Strengthen risk and claim management: All suppliers have to integrate risk and claim management into their project management to reduce negative impacts on their bottom line (e.g. of program delays). All-time transparency on a project’s status is vital. Proven methods are needed to identify, analyze, and sustainably avoid failures and poor quality. Those methods can be provided by OEMs and Tier-1 suppliers. Suppliers may also consider joint activities and best-practice sharing within their peer groups. To learn about financing opportunities suppli-ers may turn to associations and clusters to be directed to suitable banks and other financial service providers.

Strengthen technology differentiation and sub-supplier management: OEMs in-creasingly look for suppliers to help them improve their own technology differentiation, and they expect them to manage their sub-suppliers professionally. Pronounced technologi-cal strengths of a supplier may offset some weaknesses in enabler processes and market access. Therefore suppliers should consider state-funded r&D programs to co-finance tech-nology development. In case a supplier provides manufacturing services (e.g. milling and drilling) the development of additional competencies in manufacturing engineering should be taken into consideration. To be regarded as an attractive supplier companies have to in-clude special process suppliers in their sub-supply chains and they have to be able to manage them professionally. A joint initiative of peer companies to reach transparency and solutions on special processes should be started.


Recommendations to support organizationsMarket access network: So far none of the support organizations provides end-to-end support. Cooperation between organizations is limited as well. What is needed is an expert net-work that informally links all available internationalization services and makes them transpar-ent to suppliers. It should cover all process steps aerospace suppliers normally have to follow to do business abroad (see example provided in this study). Such a network can most prag-matically be set up “bottom up”. Aerospace clusters could take the lead and provide links to regional aerospace companies. “neutral” state-backed organizations, chambers, and associa-tions should join the network, as well as economic development agencies (some of them have European offices) and commercial service departments of embassies/consulates of countries with aerospace OEMs (primarily uSA, Canada, Brazil, russia, China). These organizations have a commercial interest to help and they tend to have extensive networks providing local as-sistance. To avoid parallel efforts and to learn from each other, the regional networks should allow some coordination by the national aerospace association. Although most of the sup-port organizations don’t focus on aerospace, they will provide industry-specific support when a “critical mass” of interested companies can be reached (e.g. 50–80 companies).

Accessible R&D schemes: Partially state-funded r&D projects have a considerable im-pact on competitiveness, especially of smaller aerospace suppliers. But although schemes are broadly known, SME suppliers’ access to r&D funding is still limited in practice. Associa-tions and clusters should actively support suppliers’ efforts in cooperation with OEMs / Tier-1 suppliers as well as ministries and project management agencies to let SMEs participate in aerospace project consortia not only as paid subcontractors, but as genuine project partners. This would help SMEs to generate their own intellectual property resulting in products they can offer to international customers.

Access to project financing: Existing state-backed programs for long-term project financ-ing to enable risk sharing partnerships are still only limitedly known to many aerospace sup-pliers. Some of the suppliers who already know these programs often perceive them as more expensive than commercial offers, even for solvent companies of a certain size. Therefore, the national aerospace association supported by regional clusters should start a regular dia-logue with banks and other financial service providers to advance bankers’ knowledge of the aerospace industry’s specifics to facilitate financing decisions and to jointly think about “new” financing models. (State-backed) banks tend to be prepared to do so, when a “critical mass” of potential customer companies can be reached (e.g. 30–50 companies).


Today, the tasks of aerospace suppliers are much more diversified than they used to be, which forces the companies to develop a broader skills portfolio.

OEMs increasingly look at the total value of a supplier; in addition to the traditional strengths of European suppliers, namely their product and process know-how, service aspects of their value proposition come into focus. Supporting processes and skills play an ever more important role in supplier evaluations and ratings. Due to the global price competition, even on OEM level, customers expect their suppli-ers to do business internationally, and to take over topics like quality management and improvement, sub-supplier management, internal steering, and risk management. We have seen that a fraction of Euro-pean aerospace suppliers – including SMEs – already provide this broad skills portfolio needed to secure attractive work shares in future global aircraft programs. But the majority of the aerospace suppliers surveyed have not yet reached this point: only 70% of them seem to be capable to remain players in this challenging industry.

Individual efforts have to be complemented by joint actions along the whole aerospace supply chain, including the OEM level, to maintain a competitive industrial base in Germany and Europe. Support organi-zations should utilize their leading role to initiate and steer coopera-tive efforts of suppliers and facilitate the discussion and exchange between all market participants.

Suppliers not willing to invest into their future capabilities need to rethink their business model. They might still get some orders, but their aerospace business will become extremely volatile as future contract awarding will depend on capacity constraints in other parts of the supply chain. In the end, these companies will have to invest just to remain in the business – they will have to increase flexibility and speed in their order-to-delivery process. However, the aerospace investment would be well spent, as it might turn out to be useful and profitable in other industry segments as well.

CONCLUSIONS


Definition SME: small and medium-sized enterprises; EU definition ≤ €50 m of revenue p.a., ≤ 250 em-ployees, balance sheet total not asked for. 10% of SMEs in this sample are part of larger enterprises.

Methodology, online survey participants, interview partners

METHODOLOGy

GEOGrAPHICAL SPrEAD, COMPAnIES PEr rEVEnuE CLASS (n = 135)

German and other European suppliers took part in the online survey; the sample reflects the typical SME structure of the aerospace industry.

Total salesAerospace sales

<€ 10 m

Approx. 80% of companies have total sales of up to € 50 mApprox. 50% have aerospace sales less than €10 m

SMEs

€ 10 – 20 m

> € 20 – 50 m

> € 51– 100 m

> € 250 m

> € 100–250 m

37

97

38

5

21 21

6

66

83

2420

9 7 10 104 3

16187

ONlINE SuRvEy OF SuPPlIERS

StRENGtHS & WEAkNESSES PROFIlE OF SuPPlIERS

CuStOMER INtERvIEWS (OEM, tIER-1)

DISCuSSIONS WItH SuPPORt ORGANIzAtIONS

1 2 3 4

135 suppliers completed an online questionnaire. Participants were asked 60 questions in 3 areas: company profile, interna-tionalization capability, and usage/perceptions of support measures from customers, state, associations. The ques-tionnaire was distributed by supporting associa-tions and clusters. The answers required no exposure of critical infor-mation. Suppliers could take part anonymously.

22 internationalization criteria were defined, based on 36 questions / 245 answer options of the online questionnaire. For each selected answer option, 0–20 points were given. The average cus-tomer expectation score (“red line”), based upon the interviews, was taken as 100%. The supplier scores were adjusted with the customer expec-tation score to see where customers are below and above customer expecta-tions.

12 customer interviews were conducted, each lasting on average 1.5 hours. The interviews were based on the inter-mediate results of the supplier survey (n = 95). Customers were asked to interpret the results from their viewpoint, and to state their expecta-tions towards suppliers.

5 discussions with support organizations: 3 associations, 1 cluster, 2 trade support agencies.

Germany

Europeother

BW By

nrW

HB, HH, nS, SHB, BB, MVP, S

rP, H

GEOGRAPHICAl SPREAD OF COMPANIES COMPANIES PER REvENuE ClASS


The sample is spread quite evenly across all levels of the supply chain, across technical seg-ments, as well as manufacturing and technical services companies.

SAMPLE STruCTurE (n = 135)

• Companies could choose from 0–12 manufacturing segments

• Average: 1.8 (max. = 12, min. = 0)

• Companies could choose from 0–12 technical services segments

• Average: 2 (max. = 7, min. = 0)

Engineering Services

Systems

AIrCrAFT SuPPLy CHAIn74

31 24

67

92 81

70

74

Special Machinery

Aero

- st

ruct

ures

Aero

- st

ruct

ures

Engi

nes

Engi

nes

Syst

ems

Syst

ems

Cabi

n/

Inte

rior

Airc

raft

cabi

n/

inte

rior

Compo- nents &

parts

MrO

Modules

e.g. ~blade, actuator, stringer

Tier-3 to Tier-ncomponents & parts

Tier-2modules

Tier-1systems

OEM

e.g. ~compressor, cargo-loading sys-tem, fuselage systeme.g. ~blisk/ramp system / fuselage subassembly

tECHNICAl SERvICES MANuFACtuRING

40 16

14 4

49

23

3920

15

18

84

28

22

20

16

1933

9 1615

36

11

38


Interview partners

The interview partners from “the customer side” cover airframe and aero-engine OEMs as

well as global Tier-1 suppliers of aerostructures and electro-mechanical systems.

In addition, discussions were held with support organizations.

DIS

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SS

ION

S W

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OR

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AN

IZAT

ION

S

“CU

STO

ME

R S

IDE

” IN

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WIT

H O

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-1

[2 undisclosed][undisclosed]

[undisclosed]


Michael Santo, Managing Partner of h&z, is a

seasoned expert of the aerospace and

defense industry. Before joining h&z, he held

senior management positions in the aero-

space industry. He was a German Air Force

officer and holds a master’s degree in

engineering and business administration.

Jochen Schmid is working as a consultant

for h&z. He is a member of the Aerospace

& Defense practice. Prior to joining h&z he

was a manager in an aerospace cluster for

5 years. He started his career as apprentice in

a large European aerospace and defense

company. He holds a bachelor’s and master’s

degree in business administration.

AuthorsThe study was conducted by Michael Santo and Jochen Schmid who provide experience in industry, consulting, and support organizations.

Excellent concepts: the h&z business consultants have already pro-ven their outstanding expertise in business transformation consul-tancy in more than 500 projects. And their particular empathy and intuition are apparent every time.

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