It is no secret that the aerospace and defense industry has been deeply affected by COVID. In this article, co-authors Craig Fischer and Pete Tarbox delve into some of the specific impacts, how A&D companies are responding, and the potential for future opportunities. They also look at how digital manufacturing simulation can help A&D companies meet their goals to survive and thrive.
As supply chains have been disrupted, engineering teams are questioning if their current product plans are still relevant. Downstream suppliers fight to stay open, survive, and compete in a smaller market. Let’s take a look at how A&D companies (by industry segment) initially reacted to the pandemic, how they plan to recover through next year, and the opportunities in front of them to reinvent and emerge better than they were before.
Commercial aerospace has experienced a major drop in traffic. August saw domestic travel at 49% of 2019 levels. Boeing’s situation, of course, was compounded by the 737-MAX. On Boeing’s Q3 earnings call, they said it will take two years to deliver the currently built and stored Max’s and they forecast a $200 billion pandemic related drop in market potential over the next 10 years. International travel demand is much worse, at only 12% of 2019 levels. This has a major impact in what was already a shrinking twin-aisle market. The impact will be felt for decades.
Supply chain disruptions caused a number of facility shutdowns. For a while, companies were scrambling to source essential parts. This issue became more drastic based on the location of the part. Tier ones like Spirit and Collins have seen major drops in demand, and that of course flows down to the sub tiers as well. Competitively, this has favored some companies over others. Comac has had time to continue development of the C919, while suppliers with the defense mix had an advantage of being deemed essential, and, therefore, could stay open while their competitors shut down. Companies that started with a strong cash position are better off today than companies without.
How Did Commercial Aerospace React to the Pandemic?
The first focus was on safety. Like other industries, they enforced social distancing, deep cleaning of facilities, and work from home policies. They shored up cash positions (commercial aerospace is capital intensive) so all the big players leaned on their finance execs to secure new financing with notes and loans, to restructure debt, and to maintain cash by doing things like using stock to fund pensions. They also took steps to reduce their immediate cost structure: layoffs, furloughs, and renegotiation of agreements with suppliers.
How Is Commercial Aerospace Recovering?
Companies have been surprised by the efficiency of their workforce from home. Boeing is forecasting that it can reduce its office space permanently by 30%. Some are consolidating manufacturing – for example, the 787 is moving to Charleston. A number of customers are renegotiating LTAs and focusing on getting costs out of existing designs.
How Will Commercial Aerospace Reinvent?
Commercial aerospace companies are considering whether their product planning is right for the market anymore. Boeing is re-assessing its strategy for its next new aircraft. What was once envisioned to be a short wide-body (the NMA) may be replaced by a single-aisle. Some are now questioning whether it makes sense for Boeing to develop a clean-sheet airframe at this time, given the window to capture revenue before more sustainable options hit the market. Airbus has already announced three hydrogen powered airplanes by 2035. Engine manufacturers are committing to transition to more sustainable alternatives. Companies are also looking at how to mitigate supply chain risk in the long term, and how to respond to a new competitive environment. While Boeing and Airbus may both lose shares to Comac in the Chinese market, last week Boeing increased their forecast in that region.
In the short and medium term, the Defense market is better positioned than the Commercial side, as budgets are pre-allocated and critical to national defense. They did however experience production slowdowns. For example, the production of the F-35 was immediately halted in Italy and Japan. Lockheed won’t recover F-35 schedule until the end of 2021. Due to the defense market’s heavier reliance on domestic supply chains, disruptions haven’t been as prevalent as in commercial aerospace. However, those reliant on specialty suppliers have experienced notable gaps. Overall, though, the defense sector is stable and expects to be for at least two years.
How Did Defense React to the Pandemic?
In the short term, they scrambled to keep open their manufacturing lines and supply chains. As their businesses were deemed “essential”, they were able to stay open but of course had to implement the same safety measures as others. Shoring up supply chains was the bigger challenge. The Pentagon started a push to “reshore” microelectronics manufacturing from China, which supplies 50% of the microelectronics it purchases.
How is Defense Recovering?
Companies that are in both defense and commercial have been finding ways to balance the offsetting cycles. Textron’s defense-heavy Bell Flight opened up a facility near Textron’s commercial aviation business to take advantage of their engineering resources. As they recover, companies are continuing to shore up existing supply chains. Some are shortening their payment schedules to keep supply chains funded. Some may even acquire specialized suppliers. Like Boeing, Raytheon says they may close a significant amount of office space – from 20 to 25%. To support this larger “work from home” population, companies need to invest in tools and methods to protect sensitive government data. They also need to make sure they’re well positioned for the coming downturn. We will see a solid focus on program execution and increased investments in R & D.
How Will Defense Reinvent?
The Defense market’s focus is on winning and supporting programs, and their customers’ needs are changing. As a result, the plans developed last year to support legacy platforms may have a shorter life than expected, or perhaps those platforms will be extended, and new programs will suffer.
Increased cyber-attacks are creating revenue opportunities for cyber solution providers.
We may see some public/private partnerships evolve in response to the microelectronics supply chain risk.
Finally, companies have the opportunity over the next year to figure out how they will enable their employees to collaborate around new product development and supplier management in a remote environment.
The impact on companies in the space sector has been significant, but how significant depends on where a given company fits within the sector. There are a multitude of categories, such as launch service providers, vehicle manufacturers, satellite OEMs and operators (both defense and commercial), and a large number of smaller specialty providers. Due to the geographical spread of specialty suppliers, the supply chain is extremely sensitive, and many players are facing significant challenges. While some companies have been hit hard, (Intelsat filed for chapter 11), others are thriving. SpaceX has been signing long-term government contracts – recently providing the first private delivery of astronauts to the space station.
How Did Space React?
They had the same initial impact on production facilities as other sectors, with a more severe impact on their supply chains, which created an opportunity for some onshore suppliers to get into the sector.
How Is Space Recovering?
As they recover, companies will continue to evaluate how they can reduce risks through practices like acquisition or redundancy.
How Will Space Reinvent?
Looking forward, companies will be watching where the market is going, as well as what happens to space exploration budgets. SpaceX is becoming a true low-cost defense player. How will established players like Raytheon and United Launch Alliance respond? Commercially what is the future of communications’ technologies? Starlink may be hitting at the right time to support a global increase in work from home. Is C band taking off? Companies like SpaceX and Blue Origin are also making the market more cost competitive.
The bottom line is a lot of businesses have been stripped back to their skeletons, and now have the opportunity not just to recover, but to become something better: more nimble, more adaptable, and more digital.
The Future of the Aerospace Industry is Digital Manufacturing
Digital manufacturing solutions can help companies to develop these new paths forward. Digital manufacturing simulation brings product design and sourcing teams closer to production. By leveraging digital twins and digital factories, manufacturers can collaborate across the product development process to make better design, sourcing, and manufacturing decisions that yield higher value products in less time.
How Does Digital Manufacturing Simulation Work?
Digital manufacturing simulation leverages digital twins within digital factories to optimize product design providing manufacturing insights early in the lifecycle. It then automates engineering and sourcing processes with those manufacturing insights. Product development teams are then able to integrate that manufacturing and cost data with key systems to help drive better, more complete decisions. And finally, all of this simulation takes place in the cloud, so that product development teams can collaborate from anywhere at any time.
Create a Culture of Digital Manufacturing
Ultimately it comes down to creating a culture oriented toward digital manufacturing within your company. The pandemic has accelerated many of the underlying trends from the past five to ten years, so now is an opportunistic time to evaluate how you can implement these changes or these strategies to position your company well for the years ahead.
Early adopters in digital manufacturing have a competitive advantage. A recent survey conducted by Fortune Magazine and Deloitte described that in every transformation there are front runners, followers, and laggers; and that the front runners are 5x more likely than stragglers to create new business models that disrupt their industry, completely changing the competitive landscape.
What are some of the benefits of adopting a digital manufacturing culture?
A digital manufacturing culture supports future growth and innovation. Companies that embrace digital manufacturing are more agile and responsive to change, while at the same time better positioned to execute on existing plans.
A culture of digital manufacturing allows companies (at an enterprise scale) to extract and codify the knowledge of retiring experts. Less experienced employees – without decades of manufacturing knowledge – can quickly contribute toward program goals. There are more opportunities to collaborate. We talked about the rise of remote work over the past 10 months, and while it remains to be seen how enduring this trend is, what is clear is that facilitating workflows and using the collaboration tools of digital manufacturing are valuable. And finally, a culture of digital manufacturing increases productivity, allowing you to do more with less.
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