FLUG REVUE January 2006: von Paulgerg on the problems of Germanies suppliers

January 2006

VIP Interview

HEINRICH VON PAULGERG

Managing director of Autoflug and spokesman for SME affairs of the German Aerospace Industries Association (BDLI)

Despite the upturn in aircraft production, the German suppliers industry has to grapple with problems.

FLUG REVUE: As far as civil aviation is concerned, an upswing has been under way for some time. Are the mainly medium-sized companies which make up the equipment manufacturing industry also benefiting?

Heinrich von Paulgerg: If you look at the employment figures, only up to a point. Last year the German equipment manufacturing sector shed 2.1% of its workforce at a time when sales were rising and the systems industry was booming. And sales rose by only 0.6 percent, below the rate of inflation. The successes of the systems providers on the international market are not reflected one-to-one among the European equipment manufacturers.

FLUG REVUE: Even when it comes to subcontracting to Airbus, you need to compete globally and have to submit tenders in US-Dollars. How can you succeed when you are bidding under these conditions?

von Paulgerg: The weak dollar is indeed a problem. One of the consequences of this is that the proportion of work that has been won by American equipment manufacturing firms, for example, on the A380, has definitely risen. But there are other factors as well which do not make life any easier for medium-sized equipment manufacturers. The financial challenges are a lot tougher. Both on civil and military projects, product development has to be financed up-front, with no return for several years.

Again, the cost of research and development work has to mostly be borne by the subcontractor. The Basle II provisions have made things more difficult for medium-sized companies, and credit has become more expensive. The result is that only companies with sufficient capital will survive the challenges that our industry faces today.

FLUG REVUE: What is the situation in the military sector?

von Paulgerg: The unit number reductions and the approaching end of systems like the Tornado and F-4 Phantom are bound to have a permanent effect on the revenue structure of numerous firms. For some medium-sized businesses it is an issue that is critical to survival. As fleets become smaller and smaller, there is less maintenance work around so that utilisation in the maintenance area inevitably suffers. One approach to this problem is definitely the “cooperative model”. Industry and Bundeswehr are working together to jointly maintain military aircraft. The result is that capacity is adapted to the new requirements and industry supports the necessary loss of jobs in the Bundeswehr. The resulting savings can be used to increase the proportion of resources that goes into investments.

FLUG REVUE: Has Germany won a reasonable share of the A400M programme?

von Paulgerg: On the A400M programme, a “commercial approach” has been agreed between the contractual parties. Coming from different business environments, the two sides had very different expectations. On the A400M programme, the equipment manufacturing industry was largely forced to compete at the international level according to the rules of Airbus's civil business. On the basis of its capability, the German equipment industry won a reasonable workshare.

FLUG REVUE: The aircraft manufacturers want to reduce the number of suppliers that they deal with and to increasingly buy in complete subsystems. What are the consequences?

von Paulgerg: Some major changes are already under way today. Many equipment manufacturers who negotiate today with the system manufacturers will in future work with other equipment manufacturers. What is called for today is suppliers which take full responsibility for and are able to develop, finance and produce even complex systems and which are able to globally support the fleet operations of the airlines or military customers.

In order to become a Tier 1 supplier, a company needs the financial strength, size and international competitive muscle to enable it to take on programme risks when it comes to system integration. Systems manufacturers are increasingly shifting the programme risks onto the suppliers. This is known as “risk sharing”. Companies which cannot handle these requirements will have to reposition themselves in the supply chain. They must be prepared to revert to Tier 2 or Tier 3 in the supply chain – as dictated by their capability and scope for taking on risk. They can secure their future as suppliers of technologically advanced subsystems and components to suppliers higher up in the supply chain.

The equipment manufacturers also need to do more networking. A good example is a working party at the BDLI. In this working party, cabin furnishing companies discuss common strategies and cooperation with Airbus. The initial results are very encouraging.

FLUG REVUE: In France and the United Kingdom there has been a wave of consolidation in the equipment sector. Is there not also a need for mergers in Germany, if we are to become more competitive?

von Paulgerg: Yes, it is high time for national consolidation in the German equipment industry. France and the United Kingdom have shown the way forward with the formation of large, internationally orientated conglomerates like Safran, Thales and Cobham. In Germany, many German companies are already affiliated with these foreign groups.

But consolidation is not that easy to implement: private owners are reluctant to merge and an industrial crystallisation point is lacking. For this reason the BDLI has launched an initiative to strengthen the equipment manufacturing industry. We also expect a clear commitment from the government which, for example, supports consolidation by lending financial support for mergers.

FLUG REVUE: Airbus is increasingly placing orders in strategically important markets like China. How can the German and European equipment manufacturing industry hold its own against such low-cost competition in the long term?

von Paulgerg: In the long term there is only one successful strategy – we need to develop and produce leading-edge technology. We must be at the forefront of advances and dictate the pace of innovation. It is not sufficient to offer “me too products”, as we cannot endure the cost pressure of our international competitors.

Today German aerospace companies are already investing between 15 and 20 percent of their turnover in research and development. That is quite unique when one considers the rest of German industry. But compared with other nations which view aerospace as a key strategic industry and invest heavily in it, that is not enough.

In Germany we will have to invest more rather than less in research and development in the future if we are to maintain our ability to innovative. For example, in further noise reduction, reduced environmental pollution, lower fuel consumption, greater passenger comfort etc. But for that we also need government assistance. The German government should therefore continue its aerospace research programme and significantly increase its volume. Aerospace is an attractive, highly innovative industry of great economic importance. Commitment to aerospace will certainly pay off.

From page 17 of FLUG REVUE 1/2006

Last updated 9 December 2005

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