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20 March 2017

State of play: aerospace sector forecast

The government’s green paper on industrial strategy is calling for responses. Existing aerospace analysis documents will no doubt feed into that
The government has issued its green paper consultation document for a forthcoming industrial strategy (https://is.gd/dohexi). Prior to that, there have been a couple of aerospace sector analysis documents published. Andrew Allcock reviews the sector’s condition

There is regular reference by politicians to the UK’s aerospace sector as the second largest in the world, and the sector is much mentioned in the green paper. Underlining that was a statement in a government department research paper of last July, ‘UK Aerospace Supply Chain Study’ (https://is.gd/afefol). It says: “The continued success of the aerospace industry is of particular interest to the government.”

No surprise. In 2015, the same Business Innovation and Skills publication (BIS, now Department of Business, Energy and Industrial Strategy, BEIS) says that the UK aerospace industry employed 116,000 people directly and generated revenues of nearly £29 billion, £9.2 billion of which was value-added revenue. Gross value added grew on average by 4% per annum between 2009 and 2015 (in real terms), compared to 2% for the manufacturing industry as a whole, and 1% for the whole economy. Official figures have previously stated that the sector employs 230,000 in 3,000 companies (taking in indirect activity).

The government already knows the sector well, as is noted in the recent green paper: “The government has long worked collaboratively with the aerospace industry to create one of the world’s best business environments for advanced aerospace engineering, design and manufacture.”

Indeed, it has already, through the industry-government Aerospace Growth Partnership (AGP), backed the business-driven Aerospace Technology Institute (ATI), set up in 2013. This has underpinning to the tune of £3.9 billion of joint government and industry funding in support of the development of a strategic R&D project portfolio. It will also support supply chain company productivity and cost competitiveness improvement. That funding runs from between 2013 and 2026; at outset, ATI was funded for seven years with £2.1 billion, so support has been extended and increased. The ATI is responsible for developing the UK’s aerospace technology strategy, too.

A big associated win cited is the joint £14 million investment with Rolls-Royce and Loughborough University in a collaborative research and technology project to reduce engine emissions. “The confidence provided by this type of support has helped Rolls-Royce to invest £75 million in a brand new facility in Solihull, to design and develop engine control systems. These systems are integral to the production of the company’s latest aeroengines, for which they have an order book of over £70 billion supporting thousands of jobs across the breadth of the UK,” the green paper trumpets.

There are other aerospace sector programmes, such as the £40 million National Aerospace Technology Exploitation Programme (NATEP, see link below). But the BIS research paper discovered that while it was agreed that strong support for early-stage product development is available, it is less so for late-stage development, where NATEP operates.

On supply chain matters, the BIS research paper discovered that while there is potential for growth in the sector, “it is not keeping pace with global growth”, so the UK is losing market share. In 2013/2014, UK growth was 1.2%, with the rest of the world 5.2%. There are a number of reasons.

One of those is skills. Interviewed OEMs and Tier 1s say skills are lacking, but supply chain companies surveyed (1,000 via online means) are, however, less negative about skills and their management capabilities. Such variance is a bit of theme.

The OEMs and Tier 1s had a more negative view of the supply chain’s capability to grow than did supply chain companies themselves. OEM/Tier 1 criticism was that many are either unwilling to grow, or lack the continuous improvement programmes necessary to effectively manage growth. And the fact that only 53% of surveyed supply chain companies have at least one improvement programme is held up as support for their negative view.

OEMs and Tier 1s also expressed concern that the UK supply chain is not currently well positioned to benefit from new aircraft programmes, with this linked to the supply chain’s metallic part production bias versus its low composite part production capability. But supply chain firms felt that they were well positioned, with 79% saying so.

A subset of supply chain firms completing a question about other sectors of work demonstrates that these firms are, unsurprisingly, active in other sectors, too – defence, oil and gas, and the automotive sectors, so their sector focus is diluted, perhaps affecting perspective.

The BIS research identified various areas where UK capability is deficient (see boxes below). A complete SWOT analysis is available in the document, but one identified ‘weakness’ of particular supply chain relevance is: “Most UK-based global prime contractors select suppliers using cost/quality/flexibility-led scoring metrics and do not see particular benefit in sourcing from UK; therefore, they do not proactively manage UK supply chain development.”

In fact, seemingly to address this, the AGP announced last August in a strategy document (https://is.gd/wihoye) the ‘UK Aerospace Supply Chain Competitiveness Charter’. This sees OEM and Tier 1 companies committing to promoting structured continuous improvement programmes, sharing growth opportunities with suppliers, and supporting dissemination of innovative technology.

This builds on aerospace trade body ADS’ SC21 initiative, in fact. There are currently 774 companies signed up to the SC21 programme, with 126 of them holders of bronze, silver or gold awards (there are around 500 that have previously been on the programme). But the BIS document says many companies sign up but do not complete or make significant change. SC21 is to be strengthened, morphing into the ‘SC21 Competitiveness & Growth’ programme.

The Sharing in Growth company improvement initiative set up in 2013 has also been boosted, now backed by £80 million, with intensive performance improvement at 60 companies, “securing some £5 billion-worth of contracts and 10,000 jobs by 2022”, says the AGP strategy document.

Following the BIS report and ahead of the publication of the industrial strategy green paper, the ATI published ‘Raising Ambition for UK Industrial Strategy, Lessons from Innovation in Aerospace’ (https://is.gd/qetoho), in November last year.

While underlining the country’s well signposted productivity gap as a whole, it notes that the UK aerospace sector is a leader, saying it produces “more gross value added (GVA) per [directly employed] worker than all other EU countries”. The sector must maintain improvement, of course, it adds.

Outside of that observation, the paper has four key findings: the UK could benefit from greater levels of investment in R&D activity; competition is generally good for innovation; the UK needs to boost the ‘missing middle’ in industry; the country needs to advance its infrastructure, clusters, skills and experience.

On the first, it says that “government support for R&D activity ‘crowds in’ private sector investment at a ratio of at least three to one”, but that greater support is required.

On competition, it says it is good “…so long as innovators in the UK reap a fair share of the rewards of their innovation, while remaining globally competitive in terms of their pricing”.

On the ‘missing middle’, it says: “The UK needs to grow more of these mid-sized companies – both UK economy-wide and within the aerospace sector.”

And on the final point, it stresses that innovation requires a helping hand, as other governments do more. For example, it says: “Between 2011 and 2013 within the EU, despite having the largest aerospace sector, the UK only invested the third most on aerospace research and development (behind both France and Germany). Much of the difference is accounted for by lower government investment – other countries are contributing up to 30% of their total aerospace R&D investment, compared to around 10% in the UK.”

Indeed, the central theme in the ATI publication is innovation, with the report saying: “Innovation is good for growth, contributing up to 70% of all GDP growth in the long run. Boosting innovation could go a long way in helping to solve the UK’s current productivity puzzle.” The UK is not seeing enough innovation, it states, and the ‘missing middle’ of firms in the 49-250 employee area is where the weakness is flagged up. (The ATI report draws on the BIS report above, quoting some of the supply chain issues already noted.)

The ATI tome continues, saying that 60% of R&D expenditure is in companies employing 5,000 or more people. In reality, that’s just three companies: Airbus, Rolls-Royce and BAE Systems. SMEs account for less than 3% of UK aerospace R&D expenditure. Government needs to find “ways of easing financial constraints for SMEs in order to support their innovation”. This could be achieved, for example, by “the creation of financial products enabling investors to buy into the whole portfolio of innovation among small and medium enterprises”.

The publication does note, however, that ATI is already running innovation projects with over one hundred SMEs directly, with many more involved as subcontractors.

All that said about not enough innovation, it is, nevertheless, where the major investment is made by the sector, with 75% of all spend going into “intangibles and intellectual property (R&D and software)”, with just 25% into fixed assets (buildings and machinery). That compares with a 50-50 split for the automotive sector, ATI’s document notes. It suggests that redressing this should be focused on medium-sized firms, suggesting reviewing capital allowances and tax credits, and facilitating flows of finance to SMEs to encourage greater private sector investment.

ADS says it will be working with its members up to the green paper comment deadline of April 17. There is already plenty of research and advice already out there, it appears.

TEXT BOX

Aerospace parts identified by prime contractors and key suppliers as UK capability absent, could be developed, not competitive

Systems & equipment: actuation; antennae; electric power; printed circuit boards; transmission systems; adapters – Propulsion: fuel systems – Processes & materials: carbon fibre; large forgings & machining; plating; post-machining; special resins (e.g. multifunctional epoxy); stress manufacture; stretch-forming; surface treatment; titanium machining; casting; dyes; material powder spray; thermoset moulding materials; vacuum-melted steel & aluminium; wire (specialist) – Aerostructures: bearings; rotary wing supply; extruded hose valves – Other: automated test systems; interiors; test equipment; tooling (e.g. fixtures)

A summary of products said by suppliers to be unavailable in the UK

Systems & equipment: adapters; catalytic converters – Processes & materials: carbon fibre & braids; castings; dyes; material spray powder; thermoset moulding materials; titanium machining; vacuum melted steel & aluminium; wire (specialist); zinc-nickel treatments – Aerostructures: extruded hose valves (Source: BIS report of 2015)

This article was published in the March 2017 issue of Machinery magazine.

Andrew Allcock

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http://www.machinery.co.uk/machinery-features/mep-attempts-to-automate-a-fiddly-manual-process-as-part-of-natep-aerospace-rd-programme/152615/

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