Flying Close to the Wind

December 2018 navigating complexity navigating Flying close to wind the close Flying Aerospace & Defense Top Management Issues Radar 2018 Radar Issues Management Top Aerospace Defense & 2 Think:Act A&D Top Management Issues Radar 2018

TOP THE BIG PRIORITIES IN 2018 3 P. 5 >50% of respondents believe the civil cycle has 5 or more years to run. Page 7 92% believe the aerospace workshare model of who does what in the value chain is being disrupted. Page 10 85% expect further consolidation among tier-1 suppliers, particularly in aerostructures. Page 13 Think:Act 3 A&D Top Management Issues Radar 2018 A&D leaders have trouble focusing in the face of industry disruptions.

It's been a busy year in the aerospace & defense (A&D) surveyed are preparing their companies for disrup- industry, with several major developments. tion and change. Most notably, consolidation took hold. In the aero- As well as gauging the major trends and changes space sector, Airbus announced its acquisition of Bom- within the A&D industry, our survey also highlighted bardier's CSeries regional airliner business and Boeing the challenges they pose. It found that consolidation outlined its plans to form a joint venture with Brazilian will force suppliers to choose between actively driving manufacturer Embraer. In defense, Airbus and Das- innovation and collaboration, or becoming food for sault launched a joint venture to build a next genera- larger fish. As in the auto industry, electrification is -re tion combat jet, while L3 Technologies and Harris Cor- sulting in a shift from mechanical to electrical compo- poration announced a merger plan. nents. This means the rise of new suppliers offering new M&A activity was brisk at a supplier level too, with products, and therefore a more complex supplier land- the emergence of several new super tier-1s. These in- scape with increased supply chain risk. Meanwhile, cluded the merger of aerospace suppliers Safran and digitalization means managers are not only preparing Zodiac, and the formation of Collins Aerospace, a for the implementation of concepts such as Industry union of UTAS and Rockwell Collins. Further deals and 4.0 and the Internet of Things (IoT), but dealing with tie-ups are expected, as reflected in this year's Issues more and more digitally enabled new business models. Radar survey results: 85% of respondents predict fur- It's clear from the changes and challenges revealed ther consolidation between tier-1 suppliers. by this year's survey that the A&D industry is in flux. So Yet while consolidation grabbed the headlines, the far, firms have struggled to deal with short-term topics, most significant change we saw was in the field of inno- such as unprecedented program ramp-ups, while also vation. For example, the number of electrical-propul- preparing for long-term challenges. In addition, the sion projects skyrocketed, showing 65% annual growth wide range of challenges is making it difficult to pick since 2016. The focus was on urban air mobility, with the right area to concentrate on. To address this, com- collaboration among aerospace companies and car panies need to prioritize so they can maintain a focus manufacturers particularly prominent. The race is cer- while balancing short-term operational challenges like tainly on: Cities including Dubai and Singapore have program ramp-up with medium- and long-term strate- already announced plans to offer passenger drone ser- gic challenges such as digitalization, consolidation, vices within the next few years.1 new business models and electrification. At the same time, digitalization continues to While last year our survey established that strategy shake up the aerospace industry. New business mod- is back on companies' agendas, this year we find that els, new technologies and new ways of working are they must now proactively define their future playing resulting in continuous change and innovation. In field and shape their plans to achieve short- and long-

Cover photo: jamesjames2541/iStockphoto; 333fon/Fotolia jamesjames2541/iStockphoto; photo: Cover line with this, more than half of the top executives term success.

1 See "Urban air mobility – The rise of a new mode of transportation," Roland Berger, November 2018. 4 Think:Act A&D Top Management Issues Radar 2018

APPROACH THE SURVEY This is the tenth annual edition of the Aerospace & Defense Management Issues Radar. Our goal is to support executive-level thinking across the A&D industry. For our survey this year, we received responses from over 200 senior industry executives from almost 90 companies in 15 countries, including Airbus, BAE Systems, Boeing, Leonardo, Rockwell Collins and Thales. Participants were drawn from OEMs, their tier-1 and tier-2 suppliers, as well as from various adjacent sectors such as manufacturing equipment suppliers, automation specialists, technical service providers, logistics providers and industry associations. Of the respondents, 70% work for companies with more than 1,000 employees, and 92% do business in Western Europe, 66% in North America and 61% in Asia, including China and India. A large proportion work for companies active in the commercial aircraft segment (85%) and the military aircraft segment (73%), as well as UAVs (43%).

THE SCOPE Our survey captured prevailing trends in the following three top-management issues, based on the given exemplary questions. The results of each are discussed in the next three sections.

1. Top priorities in 2018 → What are the main topics on your company's agenda in 2018?

2. Market outlook → For how long do you expect the current favorable market conditions in the civil aerospace sector to persist? → Do you think that government spending on defense will increase in the coming years? Will spending on defense increase consistently? → Do you expect the civil market for UAVs (personal mobility, flying taxis, delivery or rescue drones, etc.) to grow significantly in the future?

3. Change in aerospace ecosystem CONSOLIDATION AND COLLABORATION → Do you expect further collaboration, alliances and/or M&A activities between tier-1 suppliers in the next 3-5 years? NEW TECHNOLOGIES AND INNOVATION → How heavily will digitalization impact the aerospace & defense industry? CHANGING POLITICAL LANDSCAPE → How do you see the impact of increased threats, such as from a US trade war with the European Union/its member states, on your business? IN ADDITION, WE ASKED WHICH SEGMENTS/COMPANIES WILL BE AFFECTED → Which drivers are most likely to disrupt the aerospace value chain? → Which parts of the industry will see the greatest effect? Will it be mostly positive or negative? Think:Act 5 A&D Top Management Issues Radar 2018 Top priorities in 2018

Our survey asked participants what the main topics and Additionally, the question of what production systems issues on their agendas were. Three topics stood out: and supply chains should look like in 2025 features highly on respondents' agendas as it will be the key 1 Manufacturing (and supply chain) source of future competitive advantage.1 2 Digital transformation 3 New market/new segment entry 2 DIGITAL TRANSFORMATION 1 Digital transformation was voted the second highest MANUFACTURING (AND SUPPLY CHAIN) priority, after only being introduced to our survey two For the fourth year in a row, the A&D sector remains years ago. It's clear why: OEMs, engine manufacturers predominantly focused on manufacturing (closely and maintenance, repair and operations (MRO) provid- linked to supply chain, which finished fourth). It was ers have all launched new service offerings utilizing voted as the overall top priority, with the state of the Big Data for predictive maintenance and condition aerospace industry a key reason. The huge backlogs at monitoring. However, implementation uncertainties civil aircraft OEMs will mean ramping up output to 70 remain. For example, data ownership, privacy and pro- or even 80 narrow-body aircraft per month in the tection issues pose challenges which companies have 2020s. And as delivery slots are fully booked for several to overcome. years, OEMs are continuously looking for further increases in output rates. Even at an envisioned rate of 70 narrow-body aircraft deliveries per month, the huge backlog of over 5,500 airplanes will take another 6.5 3 years to clear. A NEW MARKET/NEW SEGMENT ENTRY In addition, OEMs and tier-1s are monitoring the With a third place in the ranking, new market/new resilience of their supply chains to lower risk and guard segment entry has returned to the top priority list against any possible interruptions. For example, delays after last appearing in the survey in 2014/15. One of in deliveries of CFM International's Leap-X engines for the key drivers behind its return is the industry con- Boeing 737 MAX aircraft have resulted in disruptions solidation over the last year. This changes the value to Boeing's aircraft delivery plans. Thus, OEMs are chain configuration of OEMs and tier-1s. With new keeping a close watch on their internal and external acquisitions and the formation of joint ventures and supply chains to ascertain if and when higher output strategic partnerships, companies are reviewing and rates are feasible, as well as assessing whether such rethinking their market positioning and product/ rate increases would be sustainable. service offering. In addition, new technologies and applications such as electrical-propulsion aircraft and

1 See "Hope on the horizon: A study of the aerostructure tooling market," autonomous manned and unmanned transport con- Roland Berger, September 2018. cepts contribute to this trend. 6 Think:Act A&D Top Management Issues Radar 2018

WHAT THIS MEANS ations (e.g. managing ramp-up, reducing costs) but Our survey shows that manufacturing is still at the also the strategic need to systematically revamp the forefront of A&D executives' minds. It is the number production system and supply chain, leveraging digital one priority for tier-1 and tier-2 suppliers, and a close thinking and technology. This underlines the shift to- second to digital transformation for OEMs, making it wards strategy we saw in 2017 and 2018 as executives top overall. This seems logical considering order books reposition for the future. are at an all-time high, with a strong focus on increas- The flip side is that the industry seems to be uncer- ing production rates to deliver the aircraft in these or- tain as to how to balance strategy and operations. The der books, while also transitioning to new aircraft sheer number of topics requiring consideration makes types, as evidenced by the production ramp-up of Air- it difficult for managers to select the right ones, creat- bus's new A350 aircraft in the last three years, the in- ing a degree of concern that is compelling companies crease in single-aisle production and the switch from to work extensively on strategy and to take risks. While A320 to A320neo and B737 to B737MAX. respondents are aware that action has to be taken, col- The prioritizing of manufacturing suggests that op- lectively there is a lack of certainty within the industry erations are currently paramount in the boardroom. on how to prioritize the topics at hand. But when combined with the other more strategic top- In summary, the priorities reveal that companies ics of digital transformation and new market/new seg- are struggling to walk the fine line between securing ment entry, the results actually show a balanced mix of their operational performance in a highly competitive strategic and operational topics ranking high on com- and dynamic market environment, and taking the nec- panies' agendas. Indeed, manufacturing and supply essary step back to project their business into the fu- chain are hybrid topics, as they not only focus on oper- ture and derive the required strategic plan.

MANUFACTURING IS AGAIN HIGHEST RANKING Main topics on companies' agenda

1 Program Manufacturing Market strategy/ Manufacturing Manufacturing Manufacturing Manufacturing management globalization

2 Market strategy/ Supply Manufacturing Supply Product Digital Digital globalization chain chain strategy transformation transformation

3 R&D Market strategy/ Product New market/new Supply Product New market/new efficiency globalization strategy segment entry chain strategy segment entry

4 Supply Program Supply Product Geographic External growth/ Supply chain management chain strategy expansion M&A and PMI chain

2011 2012 2013 2014-15 2016 2017 2018

Source: Roland Berger Think:Act 7 A&D Top Management Issues Radar 2018 Market outlook

Our survey probed market conditions in the aerospace B and defense industries. Below we consider each sector in turn. CIVIL AEROSPACE IS STILL PROMISING Aerospace & defense market outlook 2018 AEROSPACE Our survey found that the overall market outlook in 33% 21% 24% Gradual rate rises will be well-managed 2018 is significantly more optimistic than in 2017. Over by the OEMs in response to future half (53%) of the respondents believe that the current changes in demand as the industry continues on a long-term supercycle upbeat cycle will continue for at least 5 years, compared 20% to 41% in the previous year. The percentage of respon- 29% The present cycle has some way to dents who believe that we are in a "supercycle," with in- run (10-20% or more increase in 36% volume terms), after which there will creased order rates being well-managed by OEMs, has be a downturn in >5 years' time increased from 21% to 24% in the past year. In addition, 39% the number of executives stating that the market has already entered a downward cycle dropped by 5% in the 32% We are near the top of the cycle (within 10% in volume terms) and a downturn same period, underlining the positive outlook. B will come in the next 3-5 years This optimism is hardly surprising when you look at 31% recent order data. The backlog for commercial aircraft has been increasing at a steady rate over time, demon- 20% strating a growing market with strong demand. It is cur- 15% We have already entered a downward cycle1 rently plateauing at an all-time high despite reduced inflow of new orders increasing high production rates. Airbus and Boeing had total net orders of 887 air- 2016 2017 2018 craft in the first nine months of 2018. That's only about 1 Not a possible answer in 2016 40% of the full year net orders for 2017, when the two manufacturers racked up a total of 2,021. Wide-bodies largely held up demand, contributing 241 orders – C more than their total in the previous year. However, orders for narrow-bodies (B737 and A320 family) have ORDERS ARE GOING DOWN been weaker. With the narrow-body order backlog now Gross aircraft orders by type, 2017 and 2018 YTD approaching 7-10 years, it's understandable that airlines are reluctant to order aircraft (and make related down-payments) for deliveries so far down the road. 2017 1% 88% 11% 2,037 Despite the reduced inflow of new orders, our respondents are very optimistic given the current order 2018 Jan-Sep backlog, high production rates and rumors of further 73% 27% 887 rate increases (up to 70 to 80 single-aisle aircraft per month by the 2020s). C Over in Asia, however, things are beginning to hot Single-aisle Wide-body CSeries up. Asian OEMs are planning several new and complex Source: Roland Berger 8 Think:Act A&D Top Management Issues Radar 2018

DEFENSE EXPENDITURE ON A GROWTH TRACK Expectations on government spending on defense in Europe [% of answers]

Yes, I expect defense spending 32% to grow strongly in the coming 36% five years (2-5% CAGR)

Yes, I expect defense spending 62% to grow slightly in the coming 56% five years (1-2% CAGR)

No, I expect additional cuts to 6% defense spending in the coming 8% five years

2018 2017 Source: Roland Berger "Top Management Issues Radar 2018" Survey E

STRUGGLING TO MEET THE NATO TARGET Projected defense spending of European NATO members, 2017-23 [USD bn]1

+8% 117 424

+1% +5% 19 307 289 275 Other NATO 79 88 Europe countries

Spain 14 14 Italy 24 25 Germany 48 49

France 51 53

UK 59 60

2017 2018 Additional spend 1.5% of Additional spend 2.0% of spend spend if current level 2023 GDP if NATO target 2023 GDP (1.5% of GDP) is to level of 2.0% of be maintained in GDP is to be 1 At constant 2010 USD prices, applying forecasted GDP 2023 achieved in 2023 growth for Europe to all NATO Europe countries until 2023 Source: NATO, Roland Berger Think:Act 9 A&D Top Management Issues Radar 2018

aircraft programs: two regional aircraft and one large ments spend about 1.5% of their GDP on defense, and commercial airliner will enter into service in the next GDP growth on the continent is around 1-2%. This few years, namely the Mitsubishi MRJ, as well as Chi- means that the widely predicted 1-2% increase in mili- na's COMAC 919 and AVIC MA700. The OEMs involved tary spending is exactly in line with GDP growth. How- are currently in the process of establishing their first ever, to meet the NATO target of spending the equiva- plants and increasing capacity to deliver the programs. lent of 2% of GDP on defense by 2023, European Overall, our survey shows a positive outlook for governments would have to increase their defense ex- the civil market, with the large backlogs in most air- penditure by 8% a year until 2023, an unlikely scenario. craft programs keeping OEMs busy for the next few Recent half-hearted responses by European govern- years and sustaining production levels even in the ments to US demands to increase spending make this event of an economic crisis. When considered in light even more unlikely. E of the priorities in the previous chapter, this makes the Overall, however, the market outlook appears posi- tendency towards a short-term focus in manufacturing tive. US defense expenditure is expected to jump by understandable. However, short-term prospects 18% over the next 5 years, hitting almost 20% of the should not interfere with coherent long-term strategic country's federal budget by 2023, a figure not seen decision making. since the Cold War. US President Donald Trump has announced that the military will be a big winner, and DEFENSE there will also be a focus on maintaining the US nucle- Global military spending hit USD 1,740 billion in ar arsenal and readying forces to contain China and 2017, 1.1% more than the previous year. This is signif- Russia. This is in stark contrast to Russia's first cut in icant growth considering that Russia, the third larg- defense spending since 1998, referred to above, a con- est country in terms of defense spending after the sequence of economic difficulties spurred mainly by USA and China, reduced its expenditure by 20% in low oil prices, Western sanctions and the collapse of 2017. Global spending had remained relatively flat be- the ruble. tween 2012 and 2016, and growth in 2017 was primar- While it remains to be seen how Europe will re- ily driven by increased expenditure in China, Saudi spond to the US calls to spend more on defense, cuts Arabia and India. Spending in South America, West- or stagnation in defense spending are not to be expect- ern and Central Europe and South, Central and East ed in the years to come. Asia also rose slightly. In the US, defense spending is In summary, it's clear that the A&D industry is not currently growing rapidly, creating new opportunities yet operating in a fully countercyclical mode, in which for suppliers. a downturn in the commercial sector – often triggered At 94%, almost all of the industry leaders who re- by economic and political uncertainty – is countered sponded to our survey believe that military spending by a simultaneous upturn in defense spending for the will continue to rise. However, a growing majority same reasons. As things stand, both sectors show (62% compared to 56% last year) predict a rise of only growth potential, if only in the lower single digits. 1-2% CAGR (compound annual growth rate), rather than the alternative of 2-5%. D The positive trend towards increased spending be- gan in 2016, largely fueled by growing political uncertainty. The most commonly cited threats in our survey are the same as in previous years. Asymmetric dangers, such as terrorism, are a key concern for 47% of respondents, while the resurgence of tensions between East and West, rising nationalism and the de- creasing credibility of established alliances such as NATO also rate highly. To counter these, Europe is under pressure to spend more on defense. Currently, European govern- 10 Think:Act A&D Top Management Issues Radar 2018 Disruption in the aerospace ecosystem

The aerospace industry is facing a raft of disruptive results showed. We have been expecting the trend to- changes. In this section we look at what they are and wards insourcing for some time as it strengthens OEMs' how companies plan to address them. F hand against supplier consolidation and provides bet- ter access to the high-margin aftermarket. G / J THE NEW LANDSCAPE This supplier consolidation is also showing no sign To help A&D executives navigate the large number of dis- of letting up, further driving the wave. This year, avion- ruptive trends in the aerospace sector (from digitaliza- ics company Rockwell acquired cabin outfitter B/E tion to insourcing), we have clustered them into three Aerospace, with the merged entity subsequently ac- categories: changing workshare model and consolida- quired by UTC. Suppliers Zodiac and Safran merged tion; new technologies and innovation; and changing too, as did L3 Technologies and Harris, while Trans- political landscape. Below we consider each in turn, ana- Digm acquired Esterline Technologies. The creation of lyzing their short- and long-term effects and exploring partnerships was also common, especially between what our survey revealed about current industry think- aerospace firms and carmakers. Boeing, for example, ing. Finally, we look at which market segments and play- teamed up with car-parts specialist Adient to produce ers will be most affected by these changes. seats for commercial aircraft, while Daimler did a deal with dronemaker Volocopter to join the growing band CHANGING WORKSHARE MODEL of automakers teaming up with aerospace OEMs or AND CONSOLIDATION startups to work on urban air mobility. With Daimler Today's aerospace landscape is much changed com- on board, Volocopter has just announced that it will pared to that of just a few years ago. Consolidation has start trials in Singapore. H been the watchword, with numerous recent big deals pointing towards further narrowing in the future. Air- bus’ acquisition of Bombardier's regional jet program, "Supply chain consolidation the CSeries (now the A220), in July 2018, and Boeing's tie-up shortly afterwards with Brazil's Embraer, another will see OEMs reduce regional airliner producer, were the headline examples. Our survey gives a good idea of what's driving the the number of suppliers flurry of M&A activity. It points towards a shake-up of the workshare model, or the distribution of work be- significantly. Suppliers are tween OEMs and suppliers. A whopping 92% of re- challenged to reorganize spondents think the current model will change, with almost two thirds (61%) saying they will move towards their business and to look for increased insourcing (in-house production), particularly around aerostructures, avionics and interiors. Di- new customers." versifying suppliers and splitting orders to build up alternative sources are likely to be other methods, the Survey participant Think:Act 11 A&D Top Management Issues Radar 2018

DISRUPTIVE TRENDS ABOUND The topics on A&D executives' agenda

Automation Version shift (ceo to neo) No new (immediate) programs UAM Collaboration/alliances Program lifetime end Inflight connectivity Consolidation Insourcing Emergence of local supply chains Global trade wars Electrical/hybrid propulsion Voiceless ATC Changing materials/new production technology Nationalism Digitalization Cost optimization Ramp-up/investment decision Open rotor/UltraFan

THE RISE OF SUPER TIER-1 SUPPLIERS AND OEMS' COUNTERMEASURES Change in the supply chain structure

OEM 1 OEM Tier-1 OEMs integrate Rise of vertically Tier-1 super tier-1s 2

Tier-2 Tier-2

Tier-3 Tier-3

Raw materials Raw materials 12 Think:Act A&D Top Management Issues Radar 2018

CONSOLIDATION UNDERWAY M&A trajectory of avionics companies UTC and Safran

UTC 1997 2008 2010 2012 2014 2016 2018

Goodrich Cleveland Pneumatics Rohr Crompton Technology Group

DeCrane Aerospace Microtecnica Rockwell Collins B/E Aerospace Dräger Satair A/S Interturbine Project Management KLX

EMTEQ

Safran 2008 2010 2012 2014 2016 2018

Zodiac

Sell

Heath Tecna

IMS

Northwest Aerospace Technologies

TriaGnoSys

Threesixty Aerospace

Greenpoint Technologies

Source: Roland Berger Think:Act 13 A&D Top Management Issues Radar 2018

I J

TOP SUPPLIERS JOIN FORCES INSOURCING TREND AMONG OEMS Expected consolidation in the tier-1 segment Expected change along the supply chain

8% 15% 85% No, I expect no changes No, I don't expect Yes, I expect in workshare in the short further collaboration, further to medium term alliances and/or consolidation M&A activities between tier-1 suppliers 31% 61% Yes, I expect Yes, I expect production further to be shifted insourcing to new to happen countries/ regions

92% Top 3 areas for consolidation: expect a change in 72% Aerostructures / 40% Avionics / 34% Interiors the current model

Source: Roland Berger Source: Roland Berger

In the short term, the experts we surveyed believe that and limiting competition. OEMs therefore want to re- the M&A activity will continue. Three quarters expect vive competition, and the best way to do this is to create further alliances and collaboration among OEMs, with new big players, either through consolidation of firms most predicting these will take one of two forms. Some on the same tier, through sponsoring the development 40% predict joint development activities, such as the of new entrants, or through vertical integration. tie-up between Airbus Defence & Space and Dassault Another growing trend in the industry is interna- on the FCAS combat aircraft, or between suppliers on tionalization. Some 30% of our experts expect a shift of electrical propulsion. And 45% foresee mergers for production capacities to new countries. They predict specific programs or aftermarket activities, such as be- that the focus will be on Asia, especially China, India, tween airframe and engine OEMs, or on UAVs. Mean- the Middle East and Turkey, as well as North African while, an astonishing 85% of respondents expect states such as Morocco and Tunisia. J further M&A activity among tier-1 suppliers, the result India and Saudi Arabia are two good examples of of intense pressure from value chain disruption. This countries that have launched comprehensive policies is most likely to happen in aerostructures and interi- to stimulate local aerospace supply chains. India wants ors, as our survey highlights. I to transform itself into a global design and manufac- Some 72% of respondents believe the aerostructure turing hub, with manufacturing making up 25% of its segment is particularly ripe for consolidation. Similar GDP by 2020. In aerospace, this involves opening itself predictions are made for the avionics and interior mar- up to OEMs and encouraging partnerships with local kets. The reason is that the deals between Rockwell/BE/ companies. India is also investing in infrastructure, UTC and Zodiac/Safran mean this pair now dominate innovation and skills. Saudi Arabia is doing something the segment, edging smaller rivals out of big contracts similar as part of its attempt to diversify its economy. 14 Think:Act A&D Top Management Issues Radar 2018

K main driver of new business models in adjacent markets, such as urban air mobility, UAVs and purely digi- INDIA AND SAUDI ARABIA MOST PROMISING tal services. Expected shift of production to new countries These figures suggest that A&D players, despite a stronger focus on business model innovation in the past year, are falling behind the digitalization curve and Middle East 27% are focusing on the easier things (e.g. processes) rather than tackling the more fundamental topics (e.g. business models). This fits well with another of the study's India 58% findings – that the industry is aware that action is nec- essary but lacks priorities and strategic direction. M

Other 15% Impact of new technologies Our survey respondents were clear about the way new Source: Roland Berger "Top Management Issues Radar 2018" Survey technologies will affect the industry, especially in aircraft design. When asked where the greatest potential for disruptive changes in aircraft design lay in the short and medium term, three areas led the field: engine and As a big arms importer, its goal is to ensure that 50% of propulsion, aerostructures and cabin interiors. Within its military equipment budget is spent domestically by these, electrical/hybrid propulsion, 3D printing and 2030. K additive manufacturing were the main disruptors. The prospect of electrically propelled aircraft was NEW TECHNOLOGIES AND INNOVATION of most interest. The number of announced electri- Our survey identified two stand-out topics in this area, cal-propulsion development programs has risen sharp- namely digitalization and the impact of new technolo- ly in recent years, from 44 in 2016 to 85 in 2017 and gies, particularly around aircraft design. 130 in just the first nine months of 2018. When asked in which year they think a 50+ seat electric plane will Impact of digitalization make its first revenue flight between London and Paris, We know from section one that digital transformation respondents broadly agreed that a hybrid aircraft is the second highest priority for industry leaders. Even could enter service by the early 2030s. The average pre- if the number of respondents who feel that digitaliza- diction for an all-electric flight was 2043. The hybrid tion is already having an impact increased by only 4% timeline matches the expected introduction date of compared to 2016, the fact that this view is now held by Boeing and Airbus's next generation of single-aisle 43% indicates that the firms are now starting to imple- aircraft. This, however, creates a dilemma for aircraft ment first use cases. 65% of respondents state that manufacturers. Should they launch new single-aisle they are working on new product/technology offerings aircraft programs with conventional propulsion and (20% in the 2017 survey), while more than 50% are working on new service offerings/business model innovation (40% in the 2017 survey). L However, industry leaders still see digitalization as a means to improve their current business, but are rel- "It's the poor old folks atively uncertain about which areas it can be applied in the middle to. Processes are thought to have the highest potential for innovation in the short and medium term for the who will be squeezed entire industry, with 37% support, followed by product innovation (30% overall, but 40% among tier-1s) and from all directions." business model innovation within core markets (27%). Most notably, only 6% believe that digitalization is the Survey participant Think:Act 15 A&D Top Management Issues Radar 2018

A&D GOES DIGITAL Impact of digitalization on the industry

Yes, it is already 43% impacting the industry 41% heavily 39% 2 years 62% 66% Yes Yes, it will heavily 19% 67% 94% impact the industry in 25% 96% the next 2 years 28% 97%

Yes, it will heavily 32% impact the industry in 30% the next 5 years 30%

No, it will not impact 6% the industry heavily in 3% the next 5 years 2%

2018 2017 2016

Source: Roland Berger "Top Management Issues Radar 2018" Survey

run the risk of these being obsolete in 5-10 years' time, "New entrants such or should they wait until electrical propulsion is more mature before launching new programs? as SpaceX will disrupt the When it came to technological disruption in aerostructures and cabin interiors, roughly one third of in- supply chain. They dustry leaders predict that this will focus mainly on new have a strong competitive production concepts and materials. Alongside 3D printing and additive manufacturing, participants predict a edge thanks to strong push towards connectivity to enhance customer experience and facilitate improved cabin management by starting from scratch and airlines. not having a legacy CHANGING POLITICAL LANDSCAPE bureaucratic organization The current trade dispute between the US and China is the overriding risk when it comes to geopolitics and that needs to adapt to the A&D industry. Our respondents believe a full-blown trade war would result in a major downturn, in partic- change." ular, in the civil aerospace industry. Close behind is the risk of a trade war between the US and Europe. Some Survey participant 16 Think:Act A&D Top Management Issues Radar 2018

NEW LOOKS, NEW INSIDES Main expected areas of disruptive changes in aircraft design

15% 33% ATM AND GROUND SYSTEMS CABIN INTERIOR Remote ATM Inflight connectivity/digital cabin Unmanned Traffic Management (UTM) Passenger space optimization Voiceless ATC/enhanced connectivity 3D printed parts/additive manufacturing

27% AVIONICS Single pilot/ autonomous flying

43% 35% ENGINE AND PROPULSION AEROSTRUCTURE Electric fan Inflight connectivity/digital 3D printing/ additive manufacturing Hybrid fan New composites/lightweight materials Open rotor New processes/automation

Source: Roland Berger

59% of respondents think that any sanctions or in- regard them as an opportunity to participate in the creased taxes between the two markets will weaken APAC market. their competitiveness. However, 15% see a positive Meanwhile, Brexit is becoming less of a concern. A side to the stand-off and predict that it could allow growing number of experts think it is too early to say non-US suppliers to emerge in non-US programs. what effect Britain's split from the EU will have (60% in Furthermore, regarding China, survey participants 2018 vs. 42% in 2017). anticipate that local content requirements, which force And what of the long-term geopolitical situation? OEMs to source some materials locally, will have zero We predict that advances in automation and artificial negative, or even a positive, impact on the status quo of intelligence will shift production back from some of most companies. Only 14% see these requirements as the low-cost countries to either established regions or a threat due to increasing competition, and 43% even other emerging markets. This view is supported by Think:Act 17 A&D Top Management Issues Radar 2018

TENSIONS RISING Expected impact of geopolitical trends on the A&D sector

Any sanctions or taxes 68% between both industrial 58% 59% zones will weaken 61% our competitiveness 47%

15% It will allow non-US 15% suppliers to emerge in 15% 6% non-US programs 20%

17% There will be no 27% significant impact on 26% 33% our business 33%

2018 OEM Tier-1 Tier-2 Other

Source: Roland Berger "Top Management Issues Radar 2018" Survey

survey respondents, 61% of whom expect emerging economies in general to swiftly develop local A&D O supply chains, particularly in the Middle East and In- DISRUPTIVE TIER-1 SUPPLIERS dia. N Disruption potential by value chain level

SEGMENTS/PLAYERS AFFECTED This year's survey has established that the players and segments facing most disruption from changing in- OEM 19% dustry trends will be tier-1 suppliers particularly in aerostructures, engines and interiors. O So who will be the disruptors along the A&D value Tier-1 48% chain? Large established players (38%) and new entrants (21%) are predicted to have the most potential to disrupt, whereas niche players (18%), startups Tier-2 33% (17%) and financial players (5%) are not widely regard- ed as threats. According to one survey participant, "Supply chain consolidation will see OEMs reduce the number of suppliers significantly. Suppliers are chal- Source: Roland Berger "Top Management Issues Radar 2018" Survey 18 Think:Act A&D Top Management Issues Radar 2018

lenged to reorganize their business and to look for would develop new products or technologies, such as new customers." lightweight or new materials, autonomous vehicles, OEMs are feared most by tier-1 and tier-2 suppliers electrical or hybrid propulsion, sensors or improved (at 40% and 67% respectively), while OEMs themselves digitalization, and 52% would consider new service of- mostly worry about new entrants as the main cause of ferings, specifically data-driven solutions and after- disruption (at 56%). As one expert said, "New entrants sales or MRO services. such as SpaceX will disrupt the supply chain. They have Only 31% would choose to respond to disruption a strong competitive edge thanks to starting from by developing new production concepts, with most scratch and not having a legacy bureaucratic organiza- opting for improved automation and 3D printing. tion that needs to adapt to change." However, 85% of industry leaders expect concepts When experts were asked how they would expect from adjacent industries to be implemented within their company to react to disruption threats, most said A&D as pressure increases due to changing production they would turn to new products, technology or service requirements. Almost all OEM respondents (95%) are offerings – a proven pathway. Broken down, two thirds expecting this to happen.

Conclusion: Strategic planning required

The A&D industry is facing a large and diverse number of But despite all the possible disruptions facing the indus- issues. That said, the many challenges identified by our try, market leaders seem to be reluctant to translate these survey participants make it difficult for A&D companies to threats into clear strategic actions within their business focus on any particular threat. This worrying lack of clari- model. Instead, they are too tied up with short-term prob- ty is occurring at a time when the industry is experiencing lems addressing near-term requirements for higher pro- rapid change in several areas. Electrical propulsion is duction rates, and seem to disregard the disruptive power shaking up the engine and propulsion sector just as in- of non-established players, including startups and niche dustry consolidation hits suppliers and upends supply players. chains. Aerostructure and cabin interior businesses are also grappling with change, for example connectivity and Last year, managers acknowledged that "strategy is back". digital services within the cabin. And the whole industry That was a very good sign. Now they should not allow a is feeling the effects of OEMs trying to establish a more short-term focus on operational topics to get in the way of balanced supplier landscape and to insource critical areas strategically preparing for the disruptions to come. of their business. Think:Act 19 A&D Top Management Issues Radar 2018 ABOUT US

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