By Shipra Wadhawan, S3 AeroDefense Supply Chain Analyst
There’s no doubt that the Aerospace & Defense industry is strategic to the global economy. Thus, it felt the Covid-19 impact, with companies limiting travel, defense trade shows canceled & contingency planning underway. With markets under pressure, new industry priorities, and increased customer expectations, the industry needs to adjust to a new and rapidly changing reality. To thrive beyond the horizon, a transformation is needed.
In order to measure the impact within the AeroDefense sector, it is of utmost importance that these defense companies identify the major impact points that will help assess their potential to shape preemptive strategies as that would help companies weather the storm.
Those major points that affected the defense industry are here as follows –
- Production/manufacturing facilities and global supply chains were affected. This is the main one as companies located in countries badly affected by the virus or those that are dependent on supply chains located in affected countries were the immediate victims of the pandemic. The nature of supply chain and resourcing patterns of the defense technology industry also affected production, as production queues with branched-out supply chains faced supply-side constraints with different components and subsystems from different sources of origin going into a final platform or solution. Regulation and reprioritization of production functions of such supply chains affected defense production.
- Business development efforts were affected – some lost, some won as there was no face-to-face communication. The defense sector relies mostly in person communication as it gives more credibility to the customers. Along with this, the defense industry is characterized by long negotiation periods, time-consuming engagements, extensive product testing & evaluation.
- Reduction in demand for defense equipment and related services. In this, defense procurement budget was affected due to countries spending more in the healthcare sector in order to fight the pandemic.
- Companies had to make tough choices that resulted in impacting finances and competencies. Maintaining all assembly lines and an active workforce in the face of reduced sales was a challenging situation faced by defense companies. Businesses were faced with tough questions: Do they maintain the workforce level or trim it at the risk of losing capable people? Do they delay payments to vendors? Do they divert R&D budgets toward paying salaries at the risk of losing technological edge? Do they relocate production sites? All this led to companies working on futureproofing themselves in order to deal with the uncertainties that stemmed from shocks caused by the pandemic.
- Stock price declines also brought some secondary effects. While trading in secondary markets did not directly affect incomes of companies, but they were still wary about its indirect consequences. So, companies that planned to issue shares in the primary market to fund capital investments did hold off as low share prices were detrimental to successful public offerings.
- Demand for MRO services was affected due to some countries retiring their old fleets, potential deferrals or cancellation open orders, the slowdown in new orders. As soon as aircraft were grounded, demand for all flight hour linked maintenance disappeared (only calendar time-based maintenance remained). Thus, MRO is hit first in any downturn, and MRO providers and spare parts suppliers suffer immediately. When aircraft return to flight, MRO activity picks up, but MRO shops first consume existing inventory before purchasing new parts from suppliers. Along with this aircraft that have been grounded might be disassembled in some instances and their parts can be used as spares, further reducing demand for spare parts from equipment suppliers.
With all this Covid-19 impact, the post-crisis AeroDefense industry will not look like it did before the crisis:
- It is expected that there will be significant downsizing of operations for both OEMs and suppliers – the industry will need to offset the resulting loss of scale by stepping up efficiency.
- Weaker & low tier suppliers such as those with more aftermarket exposure and less counter-cyclical defense business) will come under severe financial pressure.
- It is foreseen that there will be significant consolidation of the industry by companies with strong balance sheets, either to take advantage of distressed assets or to bail out suppliers to safeguard the stability of their supply chain.
Every organization is aware that supply chains have always been critical in order to get parts and assemblies delivered quickly, safely, and securely to production facilities around the world – and their resilience is even more important during the Covid-19 pandemic. It is vital for companies to assess the availability of critical components and parts and take swift actions to ensure parts supply will be in a better position post-crisis.
Aerospace and defense sector almost daily solves large, audacious challenges but getting out of Covid-19 impact has proven to be a tough one. So, business leaders are trying to make rapid decisions and take immediate actions to protect the health and safety of their people while ensuring that critical business operations continue.
S3 being one of the companies in this sector has acknowledged the impact of this pandemic & is working through this to support our customers by fulfilling their orders & working towards some stringent supply chain strategies.
Some of the steps taken to brace the impact of Covid-19 are as follows –
- Working on building a cross-functional response team in order to deal with emerging challenges by assessing permanent market shifts, coordinating with marketing, and providing communications to customers and stakeholders coupled with continuous assessment of the situation, so that relevant and effective actions are taken effectively when required.
- Working towards assessing logistics & transportation for impact on parts availability, ensuring business continuity by exploring alternate sourcing options and single-source parts.
- Proactively following with suppliers to make sure we are on track for deliveries & effectively communicating with customers to make sure they have all the information they need for their orders. Along with this, exploring some inventory strategies to avoid longer lead times, supply/demand fluctuations, etc.
- Ensuring health & safety of employees by providing them with physical & mental needs; also, ensuring building safety & cleaning is in full place. S3 has also been keeping employees up to date by providing effective internal communications to employees regarding business, goals, etc.
- Working towards detailed assessment of immediate customer open orders, deferrals & cancellations along with opportunity & sales pipeline. Also, ensuring that any data security/ITAR/GDPR implications have been fully considered and resolved.
Re-balancing operating models has become the talk of the hour because of Covid-19 impact & S3 is addressing what’s needed now, and positioning for what’s next on the horizon. For this S3 is working towards a resilient workforce, building a strong ecosystem and adaptable operations to make us best positioned to ride out the immediate challenges and build powerful, more flexible business model that can overcome future public health, economic and financial shocks.
In the short term, based on the latest trends & analysis, there is a distinct possibility that defense markets may become somewhat challenging as government budgets might react to lower revenues and grim fiscal realities.
But the high barriers to entry coupled with long-term contracts offer a way through any potential crisis and we are more likely to see a more staged recovery over the next few years rather than a quick return to form. Hence, overall, the outlook for the aerospace & defense industry rebound is extremely positive.