The future of both the aero-structures and structural engine component businesses belongs to an elite group of so-called Super Tier 1 suppliers/strategic partners. According to the latest research from UK consultancy Counterpoint Market Intelligence, the trend has accelerated with the desire of prime manufacturers to deal with smaller groups of more capable suppliers and, more particularly, those with the financial muscle to become risk and revenue-sharing partners in costly new programs.
In its view, there exist seven such Super Tier 1 players in the aerostructures sector: Alenia, Vought, Mitsubishi Heavy Industries, Kawasaki Heavy Industries, Goodrich, Hurel Hispano and Spirit AeroSystems (Boeing’s former Wichita, Kansas factory now owned by Canadian group Onex). Contenders to join this select group include GKN, Fuji, Latecoere, Stork and Sonaca/SABCA. And if the various autonomous aerostructures elements of Europe’s EADS group were to consolidate and act as one business they would probably rank third in the Super Tier 1 pecking order.
According to Counterpoint director George Burton, prime manufacturers see Super Tier 1 suppliers as vehicles with which to cut procurement costs–a way to push program risk and nonrecurring costs down the supply chain and away from their balance sheets. Larger Tier 1 firms generally can more easily accept contracts in foreign currencies and achieve the economies of scale needed to commit to longer-term price reduction.
Of course, there is nothing particularly new in primes trying to make companies farther down the aerospace food chain take all the financial pain. But Counterpoint’s research suggests that the more significant role that the elite group of Tier 1 suppliers have now assumed could actually strengthen their position in relation to the primes and allow them to fight back, making the consolidation process a double-edged sword for aircraft builders.
So where does this trend leave others who won’t or can’t commit the necessary investment to become Super Tier 1 suppliers? Some, of course, may find themselves bought by larger groups trying to strengthen their positions. Others in aerostructures, suggests Counterpoint, should focus on specific families of products, such as aircraft doors and leading edges. Alternatively, smaller firms can specialize in technology that is in particular demand or become a low-cost producer. According to Burton, the current market trend of rising demand has alleviated the pressure to choose one of those paths, but he warned that “firms need to be positioned before the next downturn.”
The Counterpoint team says that a similar trend among makers of engine structural components will trigger a wave of mergers and acquisitions–especially since several important players have landed in the hands of private equity firms, namely Avio and Firth Rixson (both owned by the Carlyle Group) and Doncasters (Royal Bank Private Equity). Germany’s MTU group has already seen its shares floated by private equity owners KKR.
UK-based Doncasters, a supplier to both Airbus and Boeing, is now being openly touted for sale at a projected price tag of around £600 million ($1 billion). At the same time, Doncasters is investing some $6.2 million in its new Blaenavon forgings center of excellence–evidence of the need to bolster capability to stay among the Super Tier 1s/strategic partners.
A final factor that may influence consolidation patterns lies with the huge state funding of research and development carried out by strategic partners of the engine manufacturers. After receiving so much state funding for R&D, will the strategic partners be content to stay as juniors or will they form new alignments? The long-anticipated replacements for the 737 and Airbus A320 airliner families could prove the catalyst.
Another trend in the engine component sector identified by Counterpoint involves the relocation of production away from the West and into low-cost countries. Such migration has seen Smiths and Firth Rixson establish facilities in China, Hampson doing the same in India and both GKN and Goodrich in Mexico. China has become particularly critical with its booming customer base for airframers, encouraging engine manufacturers to establish complete supply chains in the country.
But Counterpoint expects to see the most seismic market shifts in the airframe structures segment. “This is still a very fragmented sector and the major consolidation phase has yet to happen,” said Burton. “In our estimation, significant moves are in the pipeline driven by outsourcing from the [OEMs], the desire for a transatlantic presence and the need to gain growth technologies.”
Smiths Group chief executive Keith Butler-Wheelhouse shares Counterpoint’s prognosis for a fresh wave of industry consolidation. After announcing significantly increased profits, he predicted more mergers and acquisitions activity in the aerospace components and parts sector.
Small Companies Vulnerable
At the same time, reports have surfaced of financial vulnerability among European lower-tier aerospace suppliers. French credit insurance firm Euler Hermes recently warned that numerous independent suppliers face absorption by much larger foreign groups. According to Euler Hermes, the small French companies have found their profit margins gravely squeezed and have shown an inability to adjust their business models to the market trends outlined by Counterpoint.
One factor that has held back consolidation among aerostructures firms–the fact that big companies could not make structures cheaper than small ones–no longer necessarily applies because of automation and the increased use of composites. Counterpoint predicts that the 737 and A320 replacement programs will almost certainly follow the impressive leap in the use of composite materials by Boeing in its 787.
Even though composite materials for wings and fuselages remain more expensive than metals, the large gain in “buy to fly” and important reductions in assembly costs now outweigh the cost of the raw material. “Buy to fly” is the ratio of raw material procured to raw material incorporated in the final product. So composites carry a high buy-to-fly ratio but a structure machined from a solid (such as a metal) has a very low one.
Composites also have become increasingly popular in engine components, as illustrated by General Electric’s decision to choose a composite fan case for the new GEnx engine to power the 787 and the A350–reducing the parts count and weight in the process. According to Counterpoint, the use of polymeric composites won’t play as big a part in powerplant construction because of the heat generated by large parts of the engine. However, that issue will not inhibit the use of matrix and ceramic components.