Looking at the Aerospace Industry

I think about the aerospace industry in terms of three broad segments, categorizing them as defense, commercial, and general aviation. I am personally bullish on the aerospace industry and excited to see what unfolds during the next few years.

The U.S. defense budget for 2012 is more than $700 billion, nearly seven times what China spends on defense and 10 times the Russian defense budget. We cannot afford this level of spending going forward, and I have no doubt the Department of Defense (DOD) budget will be impacted significantly in the coming years.

What will this mean for the aero-defense industry? For certain, funding for the development of new weapon systems will be severely limited. As such, there will be an intense focus on supporting and upgrading our aging weapon systems. This will entail rethinking sourcing systems and logistical infrastructure. We will also need to engage more of the U.S. industrial base in order to facilitate rapid sourcing, and in many cases, reverse engineering of parts that are no longer in production. The maintenance and repair supply chain will have to work at hyper-speed in order to keep our aging weapon systems up and running in support of our war-fighters.

The erosion of the U.S. industrial base during the past 30 years is a national defense concern and is on the mind of the leaders at the Pentagon. Today, only a small percentage of small- and medium-sized manufacturers work directly with the DOD. Too much of the business goes through the large prime contractors – such as Boeing, General Dynamics, Northrup Grumman, Textron, etc. – who are adept at wading through the government systems and regulations. They have dedicated staff just to deal with the government in order to find opportunities, submit quotes, and handle paperwork. In many cases, once they win the contact, they turn around and subcontract the production to a small manufacturer or job shop. We the taxpayers pay a huge premium for that inefficiency.

The DOD wants to change that. The DOD wants it to be easier to connect directly to the small- and mid-size manufacturing companies in the United States who already make the parts and components the DOD needs. Connecting directly to American job shops will provide the DOD (and the taxpayers) a more efficient and faster supply chain, and, if needed, the ability to surge production. It will also reduce costs to bypass the large prime contractors and deal directly with the company that actually makes the parts and components, helping to shore up our industrial sector and create sustainable manufacturing jobs.

To help facilitate this change, the DOD founded a project called Connecting American Manufacturing (CAM, http://www.dodmantech.com/execution/CAM.asp) to create a digital infrastructure and wire up the U.S. industrial base with the DOD. Some are even comparing this infrastructure to the ever-critical national highway and aviation systems. Just as both of the aforementioned were deemed critical for national defense, they were also boons to our national commercial economy. CAM will have an impact on the broader economy and the global competiveness of the U.S. aerospace industry. I am proud to say that MFG.com has been selected by the DOD as a key provider of America’s digital manufacturing infrastructure. We are also the interface by which small- and medium-sized manufacturers can contract directly with the DOD.

The commercial aircraft sector will be in strong demand during the next 20 years, thanks to the rise of relative wealth in the Asia Pacific region, as well as technology advancements, relating to materials and manufacturing techniques that serve to reduce aircraft maintenance costs while improving fuel efficiency. This is the justification for replacing older aircraft.

Boeing officials estimate that there will be demand for 34,000 new commercial aircraft during the next 20 years valued at $4.5 trillion, with only about 20% of that demand coming from North America. Not surprisingly, the bulk of the demand will be from the Asia Pacific region, China and India in particular.

While Boeing, Airbus, Bombardier, Embraer, and BAE will be competing hard for their share of the business, new entrants in Asia such as China’s Commercial Aircraft Corporation (COMAC http://english.comac.cc/) will pose a significant competitive challenge in the Asian market and most likely create downward pricing pressure. The stakes are high, and it would not be out of character for the Chinese government to try to tilt the playing field to its advantage.

However, I believe it will take some time for the Chinese to match the critical turbine engine and avionics technology from the west, leading me to believe that they will take an aggressive approach to make strategic acquisitions or joint ventures with companies in North America, Europe, and Russia in order to gain access to the technology.

Mitch Free has appeared on Fox News, CNBC, Fox Business News, in Fortune Small Business, Business 2.0, and more.

The general aviation sector in North America will continue to remain sluggish as private aviation is a luxury that ebbs and flows with the broader economy. As such, during the recent lean economic times there has been a significant consolidation among manufacturers of general aviation aircraft, and I suspect more will come. If the U.S. government decides to impose new taxes and user fees on general aviation, as has been proposed, it will accelerate the erosion of the general aviation industry in America.

There is a lot of excitement in the general aviation industry about a new market segment, referred to as Very Light Jet (VLJ). A number of manufacturers have completed or are racing to complete the development and certification of their VLJs, including Honda’s HondaJet, Diamond’s DJET, Cirrus’ Vision SF50, Cessna’s Mustang, and Embraer’s Phenom. This could be the shot it the arm that general aviation needs, though the VLJ will need global adoption and acceptance in order for the market to be financially viable.

China and India will be very large general aviation markets in the future, but right now their infrastructure is non-existent in terms of general aviation airports, air traffic control systems, and flight training. A few general aircraft manufacturers have begun producing training aircraft in China and shipping them abroad. They are hoping to build good will and awareness in the market early, in order to capitalize on the market when it further develops. For example, Cessna is already producing a training aircraft, Skycatcher, in China. The Asia Pacific region will become a big consumer of general aviation aircraft during the next 20 years; it will be like a gold rush. The question that remains is whether or not it will be the established general aviation aircraft manufacturers that will reap the benefits or if it will be an Asian upstart.

The global aviation market is promising and the demand for it will be strong, but as the United States deals with budget constraints and Asia Pacific drives new aircraft demand, the market is going to look very different than it has during the past 20 years.

MFG.com
Atlanta, GA
www.mfg.com