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Aerospace nosedive.

Its impact on metalworking

It isn't hard to understand why the aerospace industry is important to the United States. What other segment of industry has contributed more technological advancements and developments to manufacturing? What other industry can claim that it fulfills virtually all domestic demand for its product and still accounts for $44 billion dollars in exports and a whopping $31 billion net trade surplus (both in current dollars)? Perhaps more important to Tooling & Production readers, what other industry accounted for 14.9% or $827 million of machine tool sales in 1992?

According to the CIT Group, Livingston, NJ, a major equipment financing group, the aerospace industry is the machine tool industry's best customer, far outpacing manufacturers of fabricated structural metal products as well as the automotive industry. "These latter two markets comprised 7.0%, or $390 million, and 6.9%, or $386 million, respectively, of total 1992 US machine tool investment," said Marc D Wagman, assistant vice president of business development and economic research for the CIT Group. Unquestionably, the aerospace industry is the machine tool industry's largest customer. How aerospace fares over the next five years will undoubtedly have a significant impact on the fortunes of the machine tool industry.

The aerospace market

Like the rest of us, the US aerospace industry has had to endure the longest recession in US history. It has also had to endure the peace dividend, ever increasing foreign competition, and a failing domestic and global airline industry.

In 1992, aerospace industry sales fell 4% to $134 billion from last year's record of $139 billion, according to Aerospace Industries Association (AIA) estimates. Purchase of aerospace products and services by the Department of Defense fell $4 billion (or 7%) to $52 billion, causing much of the decline. Sales of military aircraft and parts were down 9% (or $3.6 billion) to $35 billion. On a more positive note, the industry's sales to NASA and other federal agencies increased slightly from $11.7 billion to $12 billion.

Several areas of industry activity are projected to increase in current dollar terms only. Sales of civil aircraft and parts reached $37.9 billion--down after inflation. Sales of space-related products and services at $29 billion represented another decline in constant dollars. Both of these sectors had experienced strong growth over the last decade or so. Their growth, at least for the near-term, has slowed, according to David Vadas, AIA economist.

New aerospace orders were down 23%, or $30 billion, to $97 billion. The backlog of commercial jet transport aircraft fell $8 billion to $101 billion in the first nine months of 1992. A fall-off in orders from domestic customers accounted for $5 billion of the decline. For the year, the backlog of unfilled orders for all aerospace products and services is expected to fall $25 billion (or 11%) to $210 billion.

The peace dividend has been anything but a "dividend" to the aerospace industry. In addition to reduced defense spending, procurement reforms instituted during the 1980s have had a major impact on aerospace companies. Prior to the 1980s, a defense contractor would incur slight upfront costs while working to convince the government that its product would best serve Department of Defense (DOD) interests. Once its bid was approved, the contractor would be awarded a long-term contract, which more than covered its upfront costs. Additional R&D costs and prototype costs would be passed along to the DOD.

Today, however, the bidding phase is coupled with the R&D phase. Contractors must fund a greater portion of the R&D even if their chances of winning a contract are slim. In this scenario, several bidders can be taken all the way through to the prototype stage, causing each to invest substantial funds, with no assurances of any return on their investment. What's more, even the company winning the bid has no assurance that the DOD will follow up with procurement.

According to Gary Campbell, vice president, AT Kearney, Los Angeles, CA, "While DOD expenditures for R&D have remained relatively strong, there is an increasing tendency not to follow through with procurement. Thus, aerospace companies increasingly find themselves being asked to research and develop new technologies and capabilities, with no assurance that it will lead to production of goods."

This increased emphasis on pulling a product before it goes into production is expected to have a substantial impact on the supplier infrastructure, plus tooling and production sales. "If the government continues to pull projects before they go into production, and aerospace companies do not see a need for maintaining production capabilities, we think you will see many aerospace companies dumping equipment into the used equipment market," Mr Campbell continues. "This, of course, can have a seriously detrimental effect on new equipment sales."

According to Alex Vieira, consultant, AT Kearney, the problem right now is that the government is not defining what "development" will mean in an ongoing basis. "They haven't defined if 'development' means taking a design through prototyping or through production tooling," says Mr Vieira.

Increased competition is not only coming from Europe but also Eastern Europe, the Pacific Rim, and the former Soviet Union. For example, Aero Vodochody Ltd is a Czechoslovakian-based producer of military training aircraft and is one of 11 subsidiaries of the Czech holding company Aero Czechoslovak Aerospace Industry LC, based in Prague. The company produces the L-39 jet trainer and supplied 50% of all jet trainers in the world, a majority of which were sold to the former Soviet Union and other Warsaw Pact countries. "Today, all deliveries to the former Soviet Union have stopped and the company is now targeting Poland, Hungary, Thailand, Austria, Australia, South America, and Association of South East Asia Nations (ASEAN) countries as possible customers," says Carelton F Kilmer, managing partner aerospace/defense, Andersen Consulting.

In his recent trip to the Pacific Rim countries, including stops in Japan, Korea, Singapore, Malaysia, Taiwan, and Indonesia, Mr Kilmer found a strategic interest in aerospace. IPTN, the Indonesian aerospace company, is manufacturing CN-235 aircraft under license from CASA in Spain and is close to certifying its own N-250, the first aircraft completely designed and manufactured in Indonesia.

Taiwan Aerospace continues to make news with its ongoing discussions with McDonnell Douglas and British Aerospace about producing a major new aircraft in Taiwan. Of major significance was the announcement in January that British Aerospace PLC and Taiwan Aerospace signed a joint venture to build regional aircraft. The companies will form a 50-50 venture to jointly produce, market, and service the British company's regional jetliner family based on the BAe-146 design.

Aviastar, a Russian aircraft maker, reputed to be the builder of the world's largest cargo plane, intends to challenge the West's big three aircraft makers and expects to achieve number three status within the next ten years. The Russian TU-204 passenger plane may be in its final certification stage with three sold and another deal for ten rumored to be imminent. Currently negotiating with Rolls-Royce, Aviastar may soon be in a position to offer East Europeans a reliable plane with Western engines for a third less than the cost of a comparable plane from Boeing.

On the defense side of international competition, the government's lack of a clear policy is also hurting the aerospace industry. "The Russian Government is more than happy to go out and support the sale of MIGs in order to keep its production lines rolling. Same goes for the French with its Mirages and the British with its Tornadoes. But our government can be hostile toward domestic manufacturers and block sales for political reasons. As a result, people here lose jobs, and our ability to project our influence throughout the world is diminished," says Mr Vieira.

For example, during the Shah's reign, we sold Iran great numbers of F-14s. But when the revolution came, we stopped the flow of spare parts and essentially grounded Iran's fleet of F-14s. "Aerospace military sales to foreign countries could be much greater if our government were more supportive. We could sell aircraft a notch below the very latest technology to any country and still maintain control through the spare parts channel. Our aerospace companies could be a lot more effective at selling military equipment if they had a fixed policy to work with rather than a vague sense of politics that can change from month to month," continues Mr Vieira.

The failing airlines industry could not have come along at a worse time for the aerospace industry. During previous peace dividends after World War II, the Korean war, and Vietnam, commercial airline purchases had increased to offset downturns in defense spending. Now, however, old turbojets are not being retired nearly as quickly as had been previously predicted. The global recession has slowed air travel and the demand for aircraft, and US airlines, highly leveraged and with diminishing profits, are canceling orders for new planes. By some estimates, the backlog of orders for the next five years may be overstated by as much as 25%. Consequently, some industry analysts predict it may be at least five years before the commercial airline marketplace comes back up.

Survival tactics

One of the tactics aerospace is using to maintain profits during a period of declining revenue is downsizing. Employment fell by 117,000 in 1992 to 1,063,000--a 10% decline. None of the industry sectors added jobs in 1992. Employment had the largest percentage drop (down 12%, or 31,000) in the missiles and space sector. In terms of the actual number of jobs, civil aircraft-related employment declined the most--down 38,000. An additional 26,000 workers lost jobs in 1992 in the military aircraft sector.

In late January, as Tooling & Production went to press, new layoffs were announced at Boeing (15,000), McDonnell Douglas (8,700), and United Technologies' Pratt & Whitney jet engine unit (6,000). According to industry analysts, layoffs in the aerospace industry during 1993 could swell to 50,000.

Competing globally is one of the many factors challenging the aerospace industry. In the past, countries around the world were very nationalistic about aerospace and defense. It was important, from a strategic standpoint, to build your own military aircraft. It was a matter of national pride to build your own commercial aircraft. While remnants of this attitude remain, the aerospace industry is globalizing rapidly due to the pressures of raising capital for increasingly expensive projects, lower labor rates for less sophisticated manufacturing content, and the emergence of Pacific Rim and Eastern Bloc aerospace companies.

There are forces combating the globalization effort. For example, Congress blocked the sale of LTV Missile to Thomson Aerospace, and the United States blocked British Airways PLC from investing $750 million in US Air due to objections over foreign control of US airlines and an inability to agree on air routes. Despite objections raised by the US government and several US airlines in December 1992, British Airways PLC bought a 19.9% voting share in US Air for $300 million in January 1993. Under the new agreement, US government approval is not necessary because it falls under the legal cap regarding foreign control.

US aerospace companies are expected to continue to extend their reach into the global marketplace through mergers, acquisitions, and partnering. "In Korea, the aerospace industry is being fueled by co-production arrangements to build F-16s with General Dynamics and Blackhawks with Sikorsky. Samsung Aerospace, Daewoo Heavy Industries, and Korean Air are certainly benefiting from these arrangements, and an increase in the components business for Boeing, McDonnell Douglas, and Airbus is quite visible," says Mr Kilmer.

Pratt & Whitney Government Engines & Space has become the US representative of Russia's lead space propulsion company, NPO Energomash. The deal brings the RD-170, considered to be the world's most powerful liquid-fueled rocket engine, to America for civil and military applications.

Lockheed, meanwhile, has agreed to market Russia's Proton Launcher. Potential payloads include some that normally would be carried by the US space shuttle, US boosters, and Europe's Ariane boosters. The Proton is built by the Moscow-area Khrunichev Enterprise. The two companies will establish Lockheed-Khrunichev International as a joint entity to market existing and future launchers.

"Domestic suppliers to the aerospace industry are going to have to learn to extend their markets around the globe and how to compete against foreign suppliers," said Mr Vieira. "It won't be a case of jumping on a plane and flying to St Louis or Seattle. Instead, suppliers will have to be flying to Moscow, Kiev, Hamburg, Lyon, or anywhere in the world."

"We see that as a major problem right now for domestic suppliers to the aerospace industry--their tendency to concentrate on the shrinking domestic market and trying to capture a bigger share from their domestic competitors, rather than focusing on new opportunities and the threat of competition from abroad. It will be those companies that step up to what is really happening (globalization) that will become strong and grow," states Mr Campbell.

Mr Kilmer agrees that aerospace suppliers who intend to compete effectively in coming years are going to have to emulate many of the same tactics being used by the companies they are supplying. "Downsizing, streamlining, reducing time to market, thinking global instead of domestic, are all going to be key factors," states Mr Kilmer. "Suppliers are going to have to think a lot more about investing their resources in the engineering area, developing basic technologies through prototype developments, and application technologies."
COPYRIGHT 1993 Nelson Publishing
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:decline in sales of aerospace products and services
Author:Stovicek, Donald
Publication:Tooling & Production
Article Type:Cover Story
Date:Mar 1, 1993
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