29 March 2001
Outsourcing by manufacturing giants such as BAE Systems can be good news for smaller UK suppliers. But it can also mean big risks in an ever-more global environment, as David Arminas discovers
Sir Richard Evans, chairman of BAE Systems, is bullish about the British aerospace industry and how it operates in a global marketplace. "When the first [Airbus Industrie] A380 takes off with our wings and Rolls-Royce Trents (engines), this aircraft will be substantially a UK product," he told more than 200 delegates at the annual Society of British Aerospace Companies (SBAC) conference this month.
While Land of Hope and Glory was not played at the conference interval, an almost patriotic atmosphere pervaded the hall. These were the movers and shakers of an industry with a £17 billion annual turnover, the world's second largest national aerospace sector, huddled to hear about trends over the past year. Around 75 per cent of new orders each year are from overseas, thus ensuring over half their production is exported.
The SBAC has more than 400 members and around 75 per cent of companies are small and medium-sized firms (SMEs). So when the first 555-seat, double-deck A380 lifts off on a scheduled flight for Emirates airlines in 2006, it will be a triumph not just for Airbus but for the SMEs in its supply chain.
"I believe there are big opportunities out there for companies that have the stamina and the balance sheet capacity to pursue them," BAE's Evans told delegates. "That is the biggest challenge for our new generation of managers."
But what exactly are SMEs facing? "Be niche, be known and start to form alliances," said Richard Wood, chief executive of Weston Aerospace, a sensor supplier with 300 employees. "Pressure is coming down in the form of demands for greater and greater operational performance."
Greater global competition means the rules for an SME in partnership with a prime contractor are changing. First-tier suppliers are becoming "sub-primes" as they accept more commercial risk. In many cases, SMEs are funding more of the overall engineering development of a project. On the A380, Weston is being asked to make its own assumptions on the eventual success of the programme and no business is guaranteed.
"There is a huge flow-down of non-performance penalties," said Wood. "If you cause an aborted takeoff or an aircraft on the ground, you won't pay only with a free-of-charge part but also a cash penalty in the same way that you now pay cash if you stop somebody's production line."
SMEs are now being asked to supply equipment and systems free of charge to their clients when the projects are put forward for qualification and flight certification, and to support marketing initiatives to launch the big programmes. This, said Wood, is dramatically different to the past.
Prime contractors and sub-primes are also increasingly relying on SMEs worldwide for their own competitive technological edge.
This search by main contractors for technological excellence is the "Achilles heel" of a sector long looked up to by others as an model of how to integrate supply chains, said Ken Maciver, executive president of TRW Aeronautical Systems. TRW, with an £800 million turnover and 6,000 employees, has not been as good as it could have been in tapping its supply chain for efficiencies, admitted Maciver, who is also the SBAC's president.
In the past, Airbus's in-house capability was its strength, but this is changing, said Ray Wilson, its executive vice-president for procurement. "The goal is more integration with suppliers. It won't work in every area. The biggest exponent of this sort of behaviour is Bombardier. It has been doing this for a decade, and we've always tended within Airbus to build things from building blocks done in-house."
As more SMEs are drawn into aerospace's inner engineering sanctums, the risks for them are increasing. But so are the rewards.
For the first time, Airbus is asking for contributions to flight tests and other central costs from supply chain partners, said Wilson. "But we intend to have long-term partnerships and as long as people meet the deadlines and quality, they can be on the programme for the next 25-30 years."