Weak dollar forcing some companies out of Europe
While orders notched by European aerospace OEMs and suppliers in the last year have reached record levels, the continued weakness of the U.S. dollar against the euro is eroding profits and putting increased pressure on some companies to move production outside Europe to low-cost and/or dollar-zone countries.
More than a year after Nicholas Sarkozy was elected to the French presidency little has been done to address the French aerospace industry’s problems. Charles Edelstenne, who was re-elected in July as chairman of GIFAS, the French aerospace industry association, emphasized the need for the French government to take stronger measures to boost research and development and make exports a priority.
Despite the currency exchange problems, last year the French aerospace industry bettered its record 2005 and 2006 results. Landmarks included entry into service of the first Falcon 7X business jet and Airbus A380, and the introduction of Dassault’s Falcon super-midsize and Falcon 2000LX business jets and the Airbus A350XWB.
Meanwhile, major aerospace suppliers enjoyed record sales activity. The total unconsolidated revenues of the 260 GIFAS-member companies grew by 6.9 percent to ?34.6 billion ($51.9 billion). Sixty-nine percent of this sum was generated by the civil sector–an increase of almost 11 percent year-over-year. Last year, for the 14th consecutive year, orders exceeded revenues. They jumped 20 percent in 2007 and set a new record of ?57.5 billion ($86.25 billion), of which 83 percent was derived from the civil sector. Exports, accounting for 78 percent of the sum, saw a 24-percent hike, while domestic orders rose 7 percent.
However, for Dassault Aviation CEO Edelstenne the results mask a “very worrying reality.” Most aspects of aerospace activity last year were positive because the civil market is healthy and orders are up, but they are also less profitable than in the past, he said. “The U.S. dollar continues to pose a serious problem for France and other European aerospace countries,” he said. “We have a good civil market that is under permanent mortgage to the dollar. Strategies such as hedging currency and raising productivity that compensate for the falling dollar are no longer enough, compelling us to move some activities abroad.”
The biggest challenge for French aerospace companies is to stay competitive in the market, mainly with U.S. companies that bill in dollars. But French firms are having a hard time avoiding the “handicap” of the dollar/euro exchange rate. “We have a good and efficient workforce, but high labor costs are made worse by the exchange rate,” Edelstenne said. “Small- and medium-sized companies face the same major pressures as large manufacturers and have to reduce costs and relocate. The U.S. has improved competitiveness, and France must follow suit.”
To meet this challenge, GIFAS-member companies are reducing costs and transferring all kinds of work–including some nonstrategic high-tech activity–to low-cost or dollar-zone regions such as the U.S., Mexico, Eastern Europe, China, India and North African countries. “The market is good and our production rates are high so we are able to transfer work abroad without firing employees in France,” Edelstenne noted.
Production rates are higher than two or three years ago so, despite delocalizing some production, direct employment in GIFAS-affiliated companies remains unchanged at 132,000 workers with another 80,000 jobs at 4,500 subcontractors. French government aid is largely in the form of repayable loans, but falls short of what’s required, Edelstenne said. “The whole system is incoherent: the 27-member European Union does not allow subsidies, but this does not take into account the unfair impact of currency levels that seriously distort competition. And I don’t know when–or if–it will end. The U.S. has a huge deficit. Its export level is not very high and is improving only because of the low value of the dollar. The economy is weakening with the sub-prime mortgage issue having a major impact. Even a change of administration, whoever is elected president of the U.S., will not have an impact in the short term.”
GIFAS, meanwhile, is campaigning to secure more government involvement in research-and-development backing to French companies. “Aerospace creates value and wins exports, but the pressure on our profitability and our ability to self-finance R&D is endangering the industry’s future, and French public high-tech R&D is way below the level enjoyed in the U.S.”