TORONTO, April 28 /CNW/ - Operations and supply chains within the aerospace and defence (A&D) sector remain less global than in other high-technology industries, according to recently conducted interviews with CEOs and senior executives by PricewaterhouseCoopers LLP (PwC). While the industry's customer base, sources of production, and research and development (R&D) activities are already international, the report reveals that there is still room for improvement when it comes to overall globalization.
PwC interviewed 15 executives from leading companies and organizations around the world to learn more about the benefits and challenges of expanding into new international markets, and how A&D companies are addressing those challenges.
Despite accelerating investment in offshore production and R&D facilities, the A&D industry remains less global than some other technology- and knowledge-based industries according to three commonly used measures of globalization: the degree of import and export relative to total industry trade, the amount of offshore production, and the degree of globalization of technology and R&D content.
One strong indication that aerospace and defence is international but not yet global is the pattern of industry mergers and acquisitions over the last 10 years. The majority of deals by volume and value have occurred in and between the US and Europe. Seventy-six percent of the deals valued above US$50 million involved targets in North America, the UK or the Eurozone (the union of states that have adopted the euro currency as their sole legal tender). This compares to 19% of the deals with targets in Asia and Oceania (comprised of Australia, New Zealand and proximate islands in the Pacific Ocean). Middle East players were involved in only a handful of deals in 2008 and 2009, none of which had publicly disclosed values above US$50 million, after an active 2006 and 2007.
Most companies agree that their firms would benefit from increasing the pace of globalization, but a number of challenges are slowing their efforts. These include the expansion of offset requirements, increases in financial risk due to a more international supply chain, different interpretations of business ethics across cultures, the cost and complexity of export control compliance, and the potential loss of intellectual property. Companies that do globalize faster will accelerate improvements in recruiting, efficiency and R&D. They will also gain leading positions in the growth markets of the future, which lie outside of North America and the EU.
"Globalization introduces new risks and more complexity into the supply chain, but the strategies to meet these challenges are known," says Mario Longpré, partner and national leader of the Aerospace and Defence practice for PwC Canada. Most are already in use in some form within the aerospace and defence industry. Others are evident in other globalizing industries. Successful globalization is a matter of adapting, expanding and executing these strategies. The faster companies do so, the better their changes of gaining a competitive advantage."
Some of the strategies that can help manage the risks of globalization are:
- Safeguarding intellectual property
- Benefitting from export controls
- Creating ethical cultures
- Managing financial risk
- Evaluating offsets
"The composition of corporate boards in the industry is another measure of the progress still to be made in globalization," says Longpré. "PwC examined the executive and non-executive boards of the 10 largest aerospace and defence companies by revenue. Only 12% of more than 250 board members were foreign nationals. Half the executive boards did not have a single foreign member. Forty percent of the non-executive boards also did not have one foreign member. In addition, the executives we interviewed stated they were looking for international experience among their next generation of leaders."
Despite this, Longpré says that aerospace and defence has turned the corner. "Its customers and supply base are already international. The race towards true globalization has started. The winners will be the leaders in markets that will drive growth over the next twenty years and beyond."
For more information on our services to the A&D industry, please visit www.pwc.com/ca/aerospace-defence.
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