Aerospace and defense organizations looking for untapped growth opportunities but need to move quickly to appease investor/shareholders

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The FINANCIAL — While the mature aerospace and defense (A&D) markets continuing to stagnate, A&D organizations are under extreme pressure to make good on promises made to investors and shareholders to deliver growth in new areas and emerging markets.

In response, survey results released on June 18 in KPMG International’s Global Aerospace and Defense Outlook (KPMG A&D Outlook) shows that A&D organizations are looking for any opportunity to sustainably reduce costs and create new platforms for growth through more efficient research and development (R&D), through more responsive supply chains and through targeted divestments and portfolio adjustments.

For the next 12 to 24 months, keeping the business model competitive is the biggest challenge for A&D organizations (38 percent). To build strength and support growth agendas, 53 percent of respondents to the KPMG A&D Outlook cite sales growth as their top strategic priority for the next one to two years. This is followed by reducing cost structures (47 percent) and increasing cash flow from operations and improving risk controls (equal at 28 percent).

“With growth remaining slow and prices under continued pressure, A&D organizations are looking ahead for untapped opportunities and are preparing the groundwork for a positive future,” says Doug Gates, KPMG’s Global Head of Aerospace and Defense. “But with investors and shareholders becoming increasingly impatient for results, A&D organizations will need to move quickly to deliver on their promises.”

Many are looking to foreign markets for their next round of growth. More than a quarter of respondents to the KPMG A&D Outlook say they will enter into new geographic markets. A further 13 percent say they consider rebalancing their global footprint a top priority. And, while just 7 percent say they will exit unprofitable business lines, recent actions demonstrate that divestitures and consolidation will be much more prevalent than the data suggests.

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Gates comments: “Over the coming year, we expect to see significant consolidation in the sector. In part, this trend will be driven by necessity, particularly for any small-to-medium sized organizations and suppliers that are not able to win major contracts. But it will also be driven by organizations looking to reshape their portfolios with new products, services and technologies.”

Exactly half of all respondents say they are focusing on adopting new manufacturing technologies and have breakthrough innovation as their primary strategy for advancement. In tandem, 46 percent say that the substance behind their technological advancements will come via placing more dollars into R&D. Indeed, the proportion of respondents who say they will spend in excess of 6 percent of revenues on R&D over the next year will increase by 13 percentage points to 41 percent.

But many recognize that some of their innovation will require working very closely with suppliers to identify, develop and commercialize good ideas. Reflecting this reality, around three quarters of all respondents say they are already adopting more collaborative business models with their suppliers and customers. In addition, 72 percent say that they expect partnerships – rather than in-house efforts – to characterize their future of innovation.

“Those hoping to enter into new geographic markets or adapt existing products into adjacent markets should work closely with both traditional and new partners to take advantage of their local or functional expertise,” says Gates. “However, new relationships often tend to turn supply chains into increasingly complex operations and can become a drag on agility and competitiveness.”

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Recognizing this, results of the KPMG A&D Outlook suggest many of the respondents are tweaking and adjusting their supply chain models and processes. In fact, a third say that restructuring the supply chain to support growth is a top priority this year. An equal number say they are segmenting and tailoring their supply chain assets and processes in response to specific product needs and demand profiles. Furthermore, the majority of A&D respondents (54 percent) say they are focusing on lowering costs and working capital levels across the supply chain.

Gates summarizes: “In today’s disruptive and fast-changing A&D environment, new threats and competitors are emerging every day. Yet, for the A&D industry in general, the challenge has less to do with spotting new threats and more to do with how individual organizations react and respond to them.”

 

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