30 Jun Avascent First Person: Gareth Evans on A&D Market Opportunities
By August Cole
About Gareth Evans MBE
Gareth Evans is a senior advisor to Avascent. Previously, he was a Vice President in CSC, the global IT services company, responsible for developing their Aerospace and Defence (A&D) business in EMEA. Before joining CSC in 2008 he led the European A&D practice of A.T. Kearney, the international management consultancy. Here he supported Board members of leading private and public sector clients in numerous strategic, and transformational projects including M&A, diversification, market positioning, restructuring, and supply chain rationalisation. Gareth served as an officer in the Royal Air Force and had various MoD and operational responsibilities including command of a combat wing and directorship of the UK Arms Control Agency. His last military role was Studies Director at the Joint Services Staff College.
Q:How do you view the development of strategy in the A&D sector and the implications of that strategy in the corporate context?
Strategy starts by identifying the real aim – what is the outcome and effect we want to achieve – communicating it and sticking to it. Tactics – what we do and when – are about getting there and these can change depending on the circumstances. This view has been shaped by my military background. I think the best leaders set the strategy and “boundaries” within which subordinates can operate, and let the lower level leadership design and execute the tactics. In the A&D sector, at the top level, it involves deciding where the company wants to go, setting direction and empowering the business to get there. My experience is that many companies are doing just that and moving away from a “command and top down” approach. In many cases now, business units are semi-autonomous and are structured around the platforms or the technologies that they serve. Having been set a clear aim and direction of travel it is up to them to execute on that, with tactics shaped by the specifics of their offerings. The trend to delayer and thin out top-level management and bring in new executive capabilities has helped strategy be executed at the sharp end of the business.
Q:We’re seeing changes to the traditional cyclicality of the aerospace and defence sector in terms of counterbalanced up and down cycles. What’s driving this shift, and is it a lasting one?
The commercial aerospace and defence sector is shaped by the prevailing geo-political and macro-economic climates. Traditionally, when times are good and people feel confident and rich, commercial aerospace does well as airlines increase capacity to cater for more people travelling, and defence takes a hit. But when times are bad or confidence takes a knock, commercial spend tends to go down and if the world feels more insecure then countries ramp up their military and security spend, benefitting the defence manufacturers. However, at the moment this seems to not be happening. The world seems a pretty insecure and even scary place at the moment but commercial spending remains strong. Meanwhile, it seems likely that there will be even more defence spending in the US, Asia and the Middle East, with even the European market growing. It could be that people, despite the uncertainties of today’s world, still feel sufficiently confident and rich enough to want – and need – to travel. However, another factor that shapes demand is the time needed for the A&D sector to react to change. Due to long programme lead times, significant R&D investment and bulging order books in the commercial sector, our sector does not alter course quickly. My take is that there is a fair degree of “lag” in the demand and production system on both commercial and defence sides. I would imagine that the typical cyclical and counter-cyclical models will re-assert themselves, particularly if we get some big geo-political or macroeconomic shocks coming over the next three to four years.
Q:What are the demand signals right now in commercial and defence, and how are companies responding?
Looking at demand trends, commercial aerospace has done well over the past decade – surging after the post 9/11 slump. This doesn’t show much sign of slowing down any time soon, driven by demand from Asia, growth in the regional segment, introduction of next generation single-aisle airliners especially in the B737 and A320 categories. A new globalised supply base emerging from countries such as China is also a factor. On the defence side, many of the key defence suppliers have sought to reinvent themselves over the last number of years and tried to move away from metal bashing into so-called adjacent sectors. Such reinvention can be quite difficult. As there seems to be at least the promise of significantly more spending on defence equipment by Western governments, many firms are re-emphasising traditional platforms, systems and equipment. Competition for deals is as intense as ever across the industry, but product complexity, and investment costs, make co-operation between programme partners ever more important. The ability to simultaneously compete and co-operate (so called co-opetition) is now a real differentiator.
Q:There has been massive consolidation in the A&D sector over the past twenty years leading to a relatively small number of global “giants”. Can smaller companies competing aggressively create a new market dynamic?
There will always be room for new companies with something compelling to offer. But I’m not sure there is a critical demand for smaller companies per se, or for a break-up of the big global players because the business logic has been to create and sustain these large national champions for strategic reasons. I’m sure these players will continue to selectively acquire companies to build capability, scale, and market presence. Where smaller companies will be increasingly competitive and perhaps create a different market is by leveraging proprietary technology and Intellectual property, being nimble enough to support a variety of larger organisations, and becoming key enablers within A&D programmes. This is a familiar dynamic with a new twist because it introduces something different to the traditional model of large OEMs and their long-time partners setting down near immovable and unyielding supply chains.
Q:There has been intense focus on internal costs, but going forward how do you see senior leaders driving value?
This is an important question and the need for all companies to reduce and manage costs isn’t going away. Customers will continue to demand more for less and shareholders will want increasing returns on their investments; unnecessary cost kills both these. On the cost side, the list of important value-added drivers includes the introduction of formalised business planning cycles; reducing rigidity and duplication in the organisation; increasing information availability to improve decision making; creating effective make vs. buy processes; ensuring strong cash control; as well as hedging and foreign currency management. On the other hand, leaders are creating added value in revenue generation including the product innovation process in areas such as power generation, materials, and mass-customisation; M&A to build new capabilities; the creation and exploitation of new technologies especially digitisation; new market penetration and use of in-country partnerships; and more effective business development and improved opportunity capture processes. Through-life management spans many of these areas. Traditional models of selling original equipment and then spares are in many cases being replaced with leasing and service-based arrangements. Here its critical to have an accurate view of costs over a product’s life cycle, both to offer a winning deal and also to ensure cost control over what could be a 20-30-year product life-span.
Q:For Europe, the defence sector has been reinventing itself over the recent past and the defence industrial base has become arguably less asset intensive, less industrialised and less focused on bending metal. Is this going to continue?
I’m not certain that there has been a de-industrialisation in the sense that companies are moving away for their manufacturing roots, but most firms have tried to shift away from expensive, capital-intensive structures. There has also been a definite move away from top-down vertically integrated companies. It used to be that many companies did everything across the value chain from materials production, to forging, casting and machining, and then assembly and testing. Nowadays, they count on pretty complex international supply chains instead. Partly this has happened because many of the bigger players at the top of the supply chain have concentrated on new technology-rich components and less on “traditional” manufacturing. Most significantly, though, it came about because OEMs want to spread risk, capital investment and programme costs.
Companies want to stick to their core capabilities and competencies. At the top end this tends towards research, engineering, systems integration and the management of cost, data and programmes, aftermarket support, and brand management. By devolving authority and responsibility for other parts of the value chain downwards they can reduce their capital base and the size of their operations. This carries some risk, to be sure, as they are relying on suppliers for critical parts of the build process and for strategic support. At the end of the day the supply chain is only as good as its weakest link and the ultimate risk lies with the OEM. I don’t think this trend is going to change, but some companies have realised they may have outsourced too much and in turn they have brought some key activities back in house. A further factor could be a rapid increase in demand among defence customers, with their attendant supply chain restrictions. All this could lead to a re-gearing towards “bending metal” with a consequent need to ramp up capital intensity and industrialisation.
Q:Do you see any game changers and disrupters impacting on A&D in the next 5-10 years in the organisational, product or structural space?
Disruption is happening in the A&D industry, it’s just a bit slower paced than in other sectors. The industry is pretty conservative unless there is something game-changing like a “Black Swan” event. The 9/11 attacks could be seen as one of these and they hit commercial aerospace very hard. With travel impacted, there was an oversupply of airliners resulting in many being scrapped. This eventually created demand for newer models and the full order books we see now. The biggest disrupter to watch for is a change in customer demands. This might be a significant defence spending ramp up and new acquisition processes. In terms of ongoing disruption, relentless cost reduction forces companies to become more agile and to focus on core competencies and the life-cycle costs of their products. This impacts design, materials and product features, which in turn could spur the development of next generation power systems, lighter weight materials, and fuel efficiency. If you take a wider view, the growth of the Asian A&D sector is also challenging Western suppliers as Chinese firms develop an indigenous supply chain and break into the airliner market.
Q:From a portfolio perspective, where does the appetite for adjacent defence markets fit in to your views on successful growth strategies right now?
Around 10 years ago, a lot of defence companies looked around and realised that defence was a really tough market at that time. They assessed their core capabilities, whether they were engineering, technology, programme management, or data exploitation, and sought to expand their customer base because they found themselves largely dependent on government defence spending. They needed to diversify, so they sought out other segments in the private or public sectors such as energy, transport, and financial services. While this diversification has worked for some companies that moved into broader government services, many senior leaders have found it a difficult transition if their companies ranged too far from core offerings. It could well be that if defence demand picks up markedly then some of these companies will revert back to what they know best: selling defence products to defence customers. That said, I’m sure that if their track record is strong, they believe they can differentiate themselves and they have attractive intellectual property or capabilities, then they will continue to branch out.
Q:What role is data and analytics going to play in assessing market opportunities, underpinning decision making, and driving value creation?
Q:Do you see companies wanting to become more vertically integrated in the defence sector to better leverage the potential for “digital factories,” proprietary data and new manufacturing technologies such as 3D printing?
Companies don’t need to revert to more vertical integration to optimise their digital capabilities but an important selection criteria for their suppliers will be digital competency. The trend towards devolved supply chains has resulted in each player in it becoming integral to the digitised manufacturing process. Concepts such as fully automated dark factories (or at least grey ones) are reality, rather than future visions. Stepping back, the manufacturing end-to-end value chain is underpinned by digitised engineering and design, computer controlled machining, just-in-time supply and sequencing, automated test, and CRM. This underpins a range of new-build techniques including 3-D printing, composite material production, manufacturing execution systems, supply chain management and programmatics, which are all dependent on the digitally empowered supply chain. The increasing demand for through-life product management is also, to a very large extent, made possible by digitisation. With this transformation, cyber protection is critical in the manufacturing process — and for some companies another useful offering in their service portfolios.
August Cole is the writer-in-residence at Avascent. He is the co-author of Ghost Fleet: A Novel of the Next World War and the editor of the Atlantic Council’s War Stories from the Future anthology. For more information, contact firstname.lastname@example.org.
Avascent is the leading strategy and management consulting firm serving clients operating in government-driven markets. Working with corporate leaders and financial investors, Avascent delivers sophisticated, fact-based solutions in the areas of strategic growth, value capture, and mergers and acquisition support. With deep sector expertise, analytically rigorous consulting methodologies, and a uniquely flexible service model, Avascent provides clients with the insights and advice they need to succeed in dynamic customer environments.