By Alan Lund
November 5, 2009
Herb Stein, Nixon White House chairman of the Council of Economic Advisers once said, “If your horse dies, I suggest you dismount.” Many Michigan suppliers to the automotive industry have been or are now faced with a challenging dilemma - Is it time to dismount the automotive horse and find an alternative customer base? When it appears that everyone is talking about dismounting and planning to ride the aerospace and defense horses, I would suggest that we take a look to see why a company should or should not diversify into these industries.
According to www.Dictionary.com, diversification is, “the act or practice of manufacturing a variety of products, investing in a variety of securities, selling a variety of merchandise, etc., so that a failure in or an economic slump affecting one of them will not be disastrous.”
The Aerospace Industries Association’s (AIA) 2008 Year End Review and 2009 Forecast 1 for the aerospace industry (commercial and military) states; “Following four years of remarkable expansion, the U.S. aerospace industry continued to see growth in 2008, although at a more moderate rate.” The Aerospace Industries Association estimates that aerospace sales will reach $204.4 billion in 2008, following sales of $200.3 billion in 2007. The review goes on to state that projected growth rate for 2009 will be 4.8 percent and also references that the industry has a current backlog of over $404.4 billion. Yes, billion! Add to this the 2009 projected defense spending of $541.1 billion, as noted by the Office of Management and Budget 2, and one can quickly grasp the reason why an order-challenged automotive supplier would seek opportunities within the aerospace and defense industries.
In addition to the sheer volume of aerospace and defense spending, there are higher margins, quicker payments, and a business advantage I call “continued relationship assurance.” An example of this would be Boeing watching their backlog with a supplier and populating it with additional orders when it shows availability.
Are We Too Late?
Market data from a recent Michigan Diversification Strategy webinar presented the following aerospace market numbers:
These numbers indicate that Michigan is behind the diversification curve and that manufacturers have both an opportunity and work to do if they want to transition into the aerospace and defense industries.
With an aerospace backlog of more than $400 billion and defense spending in excess of $500 billion, that’s $900 billion in opportunities for a Michigan manufacturer. Michigan companies are not too late - but they are behind the curve. Remember, that today, Boeing-built planes and the military’s Mine Resistant Ambush Protected (MRAP) armored vehicles rolled off the line; possibly each without even a thought about the many suppliers available in Michigan that could do work for them. They are not waiting for you.
What’s the Downside?
The transition to anything different and new takes time, resources and a huge commitment. My review indicates that it will be twice as hard as many companies think. The aerospace market places strict demands on precise attention to detail with traceability for all materials. Producing a product or service for the defense industry requires not only the above requirements, but also an understanding and implementation of a vast number of government and/or military standards and regulations; an example would be Federal Acquisition Regulation (FAR) 52.246-2 that defines the inspection of supplies.
In addition to regulations, specifications, and a whole raft of new acronyms, a company needs to remember:
-¢ There’s no free lunch. Most aerospace and defense items are procured through a competitive bid process. As one client identified, the time to complete a thorough response and proposal submittal was substantial (days not hours). And, they did not get the bid.
-¢ In the automotive world, a typical order might be 2,500 or possibly 25,000 units per week. In aerospace and defense, typical orders can be 25 or possibly 250. It takes a different mindset, production flow, equipment utilization, etc. to compete and to sustain.
-¢ The automotive world specifies sheet metal, cast iron and injection molded plastic. Aerospace specifies titanium and materials such as carbon and glass fiber reinforced plastic composites. Handling, machining, measuring, packaging and shipping are all different.
Recently, on a given day, there were eight new solicitations released for Michigan on https://www.fbo.gov/. The solicitations ranged from a need for water purification systems to steering gears. In the last 90 days, there were 34,677 solicitations released nation wide. The dollar volume is substantial.
It’s not too late for Michigan companies to diversify, but first check to see if your horse is alive or dead.
2. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2009 www.whitehouse.gov/omb/budget/fy2009/pdf/budget.pdf
Alan Lund is a consulting principal at UHY Advisors MI, Inc. based in Southfield, Mich. Alan holds a bachelor of science degree in Mechanical Engineering from Iowa State University. Alan can be reached at [email protected].